INITIAL DECISION RELEASE NO. 106
ADMINISTRATIVE PROCEEDING
FILE NO. 3-8772
UNITED STATES OF AMERICA
Before the
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
_______________________________
In the Matter of :
: INITIAL DECISION
M. RIMSON & CO., INC., : February 25, 1997
MOSHE RIMSON, :
JONATHAN MENDE & :
ASSOCIATES, INC., :
JONATHAN AURIELIO MENDE, :
TODD LEVAUGHN HICKMAN, :
CHRISTIAN JEAN-MARIE GIRODET, :
MITCHELL AGUIRRE, :
CLAUDIO PETER IODICE, III, :
ALEX DAVID SHINDMAN, :
YEVGENY G. SHKILKO, :
DAVID FEYJIN, AND :
ROGER DANTONI, III :
:
______________________________
APPEARANCES: Kenneth W. Marcuse, Petra T. Tasheff, Robert C.
Skrzypczak, Robert G. Heim, and David G. Rizzo for
the Division of Enforcement, Securities and
Exchange Commission.
Aegis Frumento, Jenice Malecki, John F. Lang and
Rebecca White for Respondent Alex David Shindman.
Leon Lipkin for Respondents M. Rimson & Co., Inc.,
and Moshe Rimson.
BEFORE: Lillian A. McEwen, Administrative Law
Judge
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I. PROCEDURAL HISTORY
The United States Securities and Exchange Commission
("Commission") issued an order instituting these public
administrative and cease and desist proceedings pursuant to
Section 8A of the Securities Act of 1933 ( Securities Act ) and
Sections 15(b), 19(h), and 21C of the Securities Exchange Act of
1934 ( Exchange Act ). The Order Instituting Proceedings ( OIP )
was filed on August 3, 1995.1 This initial decision applies only
to Respondents M. Rimson & Co., Inc. ( Rimson & Co. ), Moshe
Rimson ( Rimson, Moshe Rimson, or Moe Rimson ), and Alex
David Shindman ( Shindman ). All of the remaining Respondents
have either defaulted or agreed to settle this matter.2
II. THE HEARING
On December 4-8, 11-13, and 18-20, 1995, I held a public
hearing. I reopened the hearing as to Respondent Shindman on
June 28, July 1-3 and 8-11, 1996, in New York, New York. During
the December 1995 hearing, twenty-nine witnesses testified for
the Division of Enforcement ( Division ) and I admitted 378
exhibits. None of the Respondents offered testimony or exhibits
on their behalf during the December 1995 hearing. At the
reopened hearing, I received into evidence eighteen exhibits and
1 On August 14, 1996, the Commission amended the OIP after the
hearing in the instant case to add except for
the respondents Girodet, Feyjin, and Dantoni, as to whom no
civil penalty is sought to the issues section
III F (OIP at 12).
2 Default Orders were entered against Claudio Peter Iodice, III
on March 7, 1996, Order Making Findings, Imposing Sanctions, and
Issuing a Cease and Desist Order by Default Against Respondent
Claudio Peter Iodice, III, 61 SEC Docket 1210; against Christian
Jean-Marie Girodet on August 23, 1996, Order Making Findings,
Imposing Sanctions, and Issuing a Cease and Desist Order by
Default Against Respondent Christian Jean-Marie Girodet, 62 SEC
Docket 1899; against David Feyjin on August 23, 1996, Order
Making Findings, Imposing Remedial Sanctions, and Issuing a Cease
and Desist Order by Default Against Respondent David Feyjin, 62
SEC Docket 1903; and against Roger Dantoni, III, on August 23,
1996, Order Making Findings, Imposing Remedial Sanctions, and
Issuing a Cease and Desist Order by Default Against Respondent
Roger Dantoni, III, 62 SEC Docket 1907.
An Order Making Findings, Imposing Remedial Sanctions and
Issuing Cease and Desist Orders against Respondents Jonathan
Mende & Associates, Inc., Jonathan Aurielio Mende, Todd Levaughn
Hickman, Mitchell Aguirre, and Yevgeny G. Shkilko was issued on
February 21, 1997, Securities Act Release No. 7395, Exchange Act
Release No. 38320.
==========================================START OF PAGE 3======
the testimony of eight customer witnesses, all of which had been
admitted into evidence in December 1995 but after the hearing had
been adjourned as to Shindman. In addition, the Division called
Respondent Shindman and Sherry Hall as witnesses in its direct
case. Respondent Shindman offered eight exhibits which I
received into evidence.
At the commencement of the hearing in December 1995,
Respondents Rimson and Rimson & Co. appeared through counsel and
on the second day of the hearing, December 5, 1995, Rimson
appeared personally and took the stand pursuant to a subpoena
that I issued at the request of the Division. Moshe Rimson
asserted his Fifth Amendment privilege against self-incrimination
and refused to answer all questions at the hearing. (Tr. 271-
90.)3 Respondents Rimson, Rimson & Co., and their counsel
elected not to attend the remainder of the hearing. I hereby
GRANT the motion to withdraw as counsel filed by Aegis Frumento
as to Respondent Shindman.
III. ISSUES
The general issue before me is whether Rimson & Co., Rimson,
and Shindman violated the securities laws. As to Respondent
Rimson & Co., it is alleged that Rimson & Co. (i) willfully
violated Section 17(a) of the Exchange Act and Rules 17a-3 and
17a-4 thereunder; (ii) willfully violated Section 17(b) of the
Exchange Act; (iii) willfully violated Section 15(b) of the
Exchange Act and Rule 15b7-1 thereunder; (iv) willfully violated
Section 15(g) of the Exchange Act and Rules 15g-2 through 15g-6
and 15g-9 thereunder; (v) willfully aided and abetted and caused
violations of Section 15(a) of the Exchange Act, or alternatively
failed reasonably to supervise within the meaning of Section
15(b)(4)(E) of the Exchange Act; and (vi) willfully violated
Section 17(a) of the Securities Act, Section 10(b) of the
Exchange Act and Rule 10b-5 thereunder, and Section 15(c) of the
Exchange Act and Rule 15c1-2 thereunder, or alternatively failed
reasonably to supervise within the meaning of Section 15(b)(4)(E)
of the Exchange Act.
3 References to "Tr." herein are to the record of the hearing in
this matter, including December 1995 and June and July 1996.
Although exhibits were identified at the hearing using sequential
numbers followed by a dash and then numbers previously used to
identify the documents (e.g. "133-646.52"), the numbers after the
dash have been omitted herein for the sake of simplicity. The
exhibits introduced by the Division are designated Div. Ex.
Exhibits introduced by Respondent Shindman are designated Resp.
Ex. None of the Respondents offered any evidence at the hearing
in December 1995.
==========================================START OF PAGE 4======
As to Respondent Moshe Rimson, it is alleged that Moshe
Rimson (i) willfully aided and abetted and caused Rimson & Co. s
violations of Section 17(a) of the Exchange Act and Rules 17a-3
and 17a-4 thereunder; (ii) willfully aided and abetted and caused
Rimson & Co. s violations of Sections 17(b) of the Exchange Act;
(iii) willfully aided and abetted and caused Rimson & Co. s
violations of Section 15(b) of the Exchange Act and Rule 15b7-1
thereunder; (iv) willfully aided and abetted and caused Rimson &
Co. s violations of Section 15(g) of the Exchange Act and Rules
15g-2 through 15g-6 and 15g-9 thereunder; (v) willfully aided and
abetted and caused violations of Section 15(a) of the Exchange
Act, or alternatively failed reasonably to supervise within the
meaning of Section 15(b)(4)(E) of the Exchange Act; and (vi)
willfully aided and abetted and caused Rimson & Co. s violations
of Section 17(a) of the Securities Act, Section 10(b) of the
Exchange Act and Rule 10b-5 thereunder, and Section 15(c) of the
Exchange Act and Rule 15c1-2 thereunder, or alternatively failed
reasonably to supervise within the meaning of Section 15(b)(4)(E)
of the Exchange Act.
As to Respondent Shindman, it is alleged that Shindman (i)
willfully aided and abetted and caused Rimson & Co. s violations
of Section 17(a) of the Exchange Act and Rule 17a-3 thereunder;
and (ii) willfully violated Section 17(a) of the Securities Act
and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.
If I conclude that the allegations in the OIP are true, I
must then determine whether remedial action is necessary or
appropriate pursuant to Sections 15(b) and 19(h) of the Exchange
Act; whether Respondents Moshe Rimson and Shindman should be
barred from participating in a penny stock offering, pursuant to
Section 15(b)(6) of the Exchange Act; whether the three
Respondents should be ordered to cease and desist pursuant to
Section 8A of the Securities Act and Section 21C of the Exchange
Act; whether disgorgement and reasonable interest are appropriate
pursuant to Section 21C of the Exchange Act; and whether civil
penalties against each of the three Respondents are appropriate
pursuant to Section 21B of the Exchange Act.
IV. CONTENTIONS OF THE PARTIES
A. The Division
As to Respondent Shindman, the Division contends that he
violated Section 17(a) of the Securities Act and Section 10(b) of
the Exchange Act and Rule 10b-5 thereunder by making price
predictions without a reasonable basis; falsely stating that
penny stocks would be imminently listed on an exchange; failing
to disclose the speculative nature of the securities he sold;
misrepresenting his position in the firm; supervising
unregistered salesmen who used illegal sales tactics; and failing
to disclose compensation arrangements. It also contends that he
==========================================START OF PAGE 5======
engaged in unauthorized trading accompanied by material
misrepresentations and omissions as to issuers and their stocks.
The Division contends that Shindman violated Section 17(a) of the
Exchange Act and Rule 17a-3 thereunder by aiding and abetting and
causing violations of the books and records provisions by Rimson
& Co. It maintains that false names and registered
representative ( RR ) numbers on order tickets and new account
forms, and false customer addresses were entered by employees at
the direction of Shindman.
The Division recommends that Shindman be barred from
association with any broker or dealer, and that he be ordered to
cease and desist from committing or causing violations or future
violations of the statutory provisions and rules that he is
alleged to have violated. It also seeks disgorgement in the
amount of $189,125 as ill-gotten gains, plus reasonable interest,
as well as $95,300 as testifying customer losses, plus reasonable
interest. Finally, the Division seeks a third tier civil penalty
of $323,850.65, representing ill-gotten gains plus testifying
customer losses and reasonable interest. (Division s Post-
Hearing Brief as to Respondent Alex David Shindman.)
As to Respondent Rimson & Co., the Division contends that
the company violated Section 15(g) of the Exchange Act and Rules
15g-2 through 15g-6 and 15g-9 thereunder and that Respondent
Moshe Rimson aided and abetted and caused these violations. The
disclosure requirements for penny stocks were not met, and forms
were falsified and forged. Secondly, it contends that Rimson &
Co. violated Section 15(b)(7) of the Exchange Act and Rule 15b7-1
thereunder by allowing unregistered salespersons to solicit and
effect securities transactions. Third, it contends that Rimson &
Co. violated the broker-dealer books and records provisions of
the Exchange Act, Section 17(a) of the Exchange Act and Rules
17a-3 and 17a-4.
The Division contends, also, that false RR names and numbers
and forged RR signatures violated the accuracy requirement of
Exchange Act Rule 15b7-1; that false order tickets and false new
account forms violated the broker-dealer books and records
provisions of the Exchange Act; and that Section 17(b) of the
Exchange Act and Rule 17a-4(j) were violated by Rimson & Co. s
failure to furnish records promptly.
As to Moshe Rimson s aiding and abetting, the Division
contends that his central position physically and
organizationally made him aware of the violations committed by
Rimson & Co. Thus, it attributes the acts of salesmen working
for Andrew Scudiero to Moshe Rimson, whereby the salesmen were
compensated by kickbacks. The misappropriation of customer
checks was also aided and abetted by Moshe Rimson, contends the
Division, and the illegal acts of the salesmen working for
Jonathan Aurielo Mende ( Mende ) at Jonathan Mende & Associates,
==========================================START OF PAGE 6======
Inc. ( Mende & Assoc. ), an unregistered broker-dealer, were
aided and abetted by Moshe Rimson, in violation of Section 15(a)
of the Exchange Act. Similarly, Moshe Rimson aided and abetted
violations of the securities laws by salesmen working for
Respondent Shindman, as well as violations by salesmen working
for Cartwright & Walker Securities. Inc. ( Cartwright & Walker ),
including David Feyjin, Roger Dantoni, III, and Yevgeny G.
Shkilko. The Division contends that Moshe Rimson aided and
abetted penny stock rules violations committed by Rimson & Co.
and Mende & Assoc., including Section 15(g) of the Exchange Act
and Rules 15g-2 through 15g-6 and 15g-9 thereunder. As the
president and compliance officer of Rimson & Co., he is
responsible for the transactions executed through Rimson & Co.,
and the orders generated by Mende & Assoc. salesmen became Rimson
& Co. customer accounts. The Division maintains that because
Moshe Rimson was aware of and allowed unregistered salesmen to
effect securities transactions he aided and abetted Rimson &
Co. s Rule 15b7-1 violations under the Exchange Act. Similarly,
they contend that Moshe Rimson aided and abetted and caused
Rimson & Co. s violations of the books and records provisions of
the Exchange Act by assisting in forging signatures and in the
use of false RR names and numbers, establishing a false customer
account system, and failing to produce books and records for
Commission examiners.
Against Rimson & Co. the Division requests four sanctions.
First, Rimson & Co. s broker-dealer registration should be
revoked. Second, Rimson & Co. should be ordered to cease and
desist from committing or causing violations of, or any future
violation of, the provisions of the federal securities laws it is
alleged to have violated. Third, Rimson & Co. should be ordered
to disgorge all ill-gotten gains and investor losses in the
amount of $1,004,164.02, plus prejudgment interest, for which
Moshe Rimson is jointly and severally liable. Fourth, Rimson &
Co. should be ordered to pay civil penalties in the amount of
$11,500,000.
Against Moshe Rimson the Division requests five sanctions.
First, he should be barred from association with any broker or
dealer. Second, he should be barred from participation in any
penny stock offering, including: acting as a promoter, finder,
consultant, or other person who engages in actions with a broker,
dealer or issuer for purposes of the issuance or trading in any
penny stock; or inducing or attempting to induce the purchase or
sale of any penny stock. Third, he should be ordered to cease
and desist from committing or causing violations of, or any
future violation of, the provisions of the federal securities
laws he is alleged to have violated. Fourth, he should be
ordered to disgorge ill-gotten gains and investor losses in the
amount of $1,004,164.02, plus prejudgment interest, for which
Rimson & Co. is jointly and severally liable. Fifth, he should
be ordered to pay civil penalties in the amount of $2,300,000.
==========================================START OF PAGE 7======
(Division s Post-Hearing Brief filed March 1, 1996.)
B. Respondents M. Rimson & Co., Inc., and Moshe Rimson
In their joint Answer, both Respondents denied allegations
in the OIP or denied knowledge and information sufficient to form
a belief as to other allegations in the OIP. At the hearing,
Moshe Rimson refused to answer questions. Neither Respondent
filed post-hearing papers.
C. Respondent Alex David Shindman
Respondent Shindman contends that he violated no securities
laws or regulations. He could not hear what the cold-callers
were saying in the boardroom and he should not be held
responsible for their actions. He denies that unauthorized
trading occurred or that he engaged in any. The use of the false
address for a customer was not a violation of the books and
records regulations, and Shindman denies aiding and abetting
Rimson & Co. s violations of Section 17(a) of the Exchange Act.
Respondent Shindman requests dismissal of the charges against
him. In the alternative, he argues that a permanent bar and
third tier penalties are too harsh and that the disgorgement
amount is excessive. His commissions from the eight testifying
witnesses totaled only $2,848.13, which is the fair figure he
should be ordered to disgorge. (Respondent Shindman s Post-
Hearing Reply Brief.)
V. FINDINGS OF FACT
The findings and conclusions herein are based on the entire
record. However, I have not considered the evidence from the
1996 proceedings against Respondents Rimson & Co. or Moshe Rimson
in making findings against them. I applied preponderance of the
evidence as the applicable standard of proof for the Division s
case. I find the following facts.
A. Respondents and Related Entities
Rimson & Co., located in New York, New York, is a broker-
dealer registered with the Commission since June 3, 1970, (Div.
Ex. 133), and was a member firm of the National Association of
Securities Dealers, Inc., ("NASD") until the NASD expelled Rimson
& Co. on August 10, 1995. (Div. Exs. 175, 176.) Rimson & Co.
had no registered or franchised branch offices. (Div. Ex. 292.)
Rimson & Co.'s primary business involved retail sales and market-
making in penny stocks and other speculative securities which are
traded through the NASD's Over-the-Counter Bulletin Board
("OTCBB") (Tr. 299), including those discussed below. Rimson &
Co. and Rimson, the registered principal of the firm, have
extensive disciplinary histories which include a permanent
injunction from violating the antifraud provisions of the federal
==========================================START OF PAGE 8======
securities laws, which was entered in 1986; sanctions in a
related Commission administrative proceeding; numerous NASD
complaints, proceedings and sanctions; the suspension or
revocation of Rimson & Co.'s broker-dealer registration by
several states; and numerous customer arbitration claims. Many
of these matters involved allegations or findings of fraudulent
sales practices. (Div. Exs. 128-29, 173-78, 180-82, 286-88, 290-
91, 293-97, 309-12.) In addition, within the last two years, the
Commission and the NASD have received over 187 written complaints
from customers of Rimson & Co., many of which allege abusive and
fraudulent conduct by the firm and its personnel. (Div. Ex.
377.)
Rimson, age 68,4 of New York, New York, from at least
January 1, 1993, to the present, has been Rimson & Co.'s sole
shareholder, sole director, president, compliance officer,
director of sales, and director of trading. (Div. Exs. 271-74,
296, 298.) Rimson's disciplinary record is coextensive with that
of his firm. (Div. Exs. 128-29, 173-78, 180-82, 286-88, 290-93,
294-97, 309-12.) Rimson and Rimson & Co. were closely associated
with all the other Respondents named in the OIP, including
Shindman.
Mende & Assoc. was incorporated in New York on March 1,
1993, (Div. Ex. 313), has never been registered as a broker-
dealer with the Commission (Div. Ex. 126), and was owned and
operated by Mende and Todd Levaughn Hickman. (Tr. 935-41; Div.
Exs. 158, 313.)
Mende, 27, of Staten Island, New York, is listed on the
NASD's Central Registration Depository ("CRD") as employed by
Rimson & Co. from May to December 1993, and as a registered
representative at Rimson & Co. from June 15, 1993, to December
1993. (Div. Ex. 292.)
Hickman, 30, of Bronx, New York, is listed on the CRD as
having been employed by Rimson & Co. from August to November
1993, but was never a RR at the firm. (Div. Ex. 292.) Hickman
was a co-owner, operator, and sales manager of Mende & Assoc.
(Tr. 935-41; Div. Ex. 158.)
Christian Jean-Marie Girodet, 27, of New York, New York, was
a registered representative at Rimson & Co. from May 1993 to June
1994. (Div. Ex. 292.) Girodet was involved in promoting and
selling World Entertainment Concepts, Inc. ("WECI") securities at
Rimson & Co., and he also functioned as a supervisor of other
salesmen involved in the solicitation of WECI securities. (Tr.
303, 332.)
4 Ages of all individuals are indicated as of the date of the
hearing.
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Mitchell Aguirre, 31, of Queens, New York, worked at Rimson
& Co. from May 1993 to February 1994, but was never approved by
the NASD as an RR at the firm. (Tr. 303; Div. Ex. 292.)
Claudio Peter Iodice, III, 26, of New York, New York;
Suffern, New York; and Boca Raton, Florida, is listed on the CRD
as having been employed by Rimson & Co. from August to November
1993, but was never approved by the NASD as an RR at the firm.
(Tr. 303; Div. Ex. 292.)
Shindman, 29, of Guttenberg, New Jersey, and New York, New
York, supervised a group of salesmen working at Rimson & Co.
(Tr. 725-34, 612-20, 1538-61, 1568-73, 1579-89, 1595-607, 1646-
60, 1664-74, 1682-705, 1712-25; Div. Ex. 292.) Shindman was an
RR at Rimson & Co. from approximately June 1993 through April
1994, and from June 1994 through the hearing in this matter in
December 1995. (Tr. 305, 725, 2627-28; Div. Ex. 292.) Shindman
obtained his Series 7 (General Securities Representative) and
Series 63 (State Securities Agent) licenses in August 1987, and
obtained his Series 24 (General Securities Principal) license in
March 1994. (Tr. 2626; Div. Exs. 292-641.) Prior to joining
Rimson & Co., from approximately the summer of 1987 to
approximately June 1993, Shindman had worked at Smith Barney,
Bear Stearns, Dean Witter Reynolds Inc., Oppenheimer & Co., and
Josephthal Lyons & Ross. (Tr. 2626-27, 2821-22.) NASD records
do not indicate that Shindman was the subject of any customer
arbitration or lawsuit, or any enforcement proceeding by any
regulatory or law enforcement agency prior to his association
with Rimson & Co. (Div. Exs. 292-641.)
Shkilko, 24, of Queens, New York, was an RR at Rimson & Co.
from October 1993 to April 1994, and again from June to November
1994. (Div. Ex. 292.)
Feyjin, 23, of Staten Island, New York, solicited securities
transactions at the New York branch office of Cartwright & Walker
from approximately June to November 1994, and he transmitted
customer orders to Shkilko at Rimson & Co. for execution. (Tr.
1448-54.) He also supervised a group of unregistered salesmen at
Cartwright & Walker. (Tr. 1448-54.)
Dantoni, 24, of Staten Island, New York, has never taken the
Series 7 Exam. (Div. Ex. 292.) Dantoni solicited securities
transactions at Cartwright & Walker branch offices in New York
and he transmitted customer orders to Shkilko at Rimson & Co. for
execution. (Tr. 1423-31.) Along with Feyjin, Dantoni also
supervised a group of unregistered salesmen at the Cartwright &
Walker branch offices. (Tr. 1423-31.)
Two additional uncharged parties were closely connected to
Rimson & Co.
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Scudiero, 33, of Queens, New York, worked at Rimson & Co. from
about April to October 1993. He held himself out to customers as
a Rimson & Co. RR, and was involved in soliciting securities
transactions. (Tr. 997.) He also directed the activities of
other salesmen, personally paid salesmen, and otherwise promoted
certain securities. (Tr. 352-53.) He was never approved by the
NASD as an RR at the firm. (Div. Ex. 292.) He has an extensive
disciplinary record, including a criminal felony conviction, and,
during the period that he worked at Rimson & Co., he was
suspended by the NASD and eventually permanently barred from
association with any member firm. (Div. Exs. 179, 292.)
Cartwright & Walker is a now-defunct broker-dealer formerly
registered with the Commission since April 14, 1989, and was an
NASD member firm. (Div. Exs. 98, 99.) It was headquartered in
Los Angeles, California, and had branch offices in New York, New
York. Several Cartwright & Walker salesmen, including
Respondents Feyjin and Dantoni, worked in a New York branch
office, represented themselves to customers as Rimson & Co. RRs,
and transmitted customer orders to Rimson & Co. for execution.
(Tr. 1401-08, 1448-54, 1423-31, 1474-91.)
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B. Securities Traded at Rimson & Co.
The securities of several issuers were involved in the
trading conducted through Rimson & Co. The common stocks of
WECI and J.A. Industries, Inc. ( JIND ) were both securities
traded on the NASD's OTCBB. (Tr. 734-35; Div. Exs. 137-45, 172,
319-22, 364, 112-16, 314, 320-22, 365, 367.) Rimson & Co. made a
market in WECI and JIND stock and Rimson & Co. was involved in
promoting and selling WECI and JIND stock to hundreds of
investors. (Tr. 734-35; Div. Exs. 137-45, 172, 319-22, 364, 112-
16, 314, 320-22, 365.)
The common stocks of the following issuers are or were
traded on the NASD's OTCBB, and are stocks in which Rimson & Co.
made a market: Biotechnology Tools, Inc., ("BTLI") (Tr. 736; Div.
Exs. 97, 315, 362); Health & Wealth, Inc., ("HWTH") (Tr. 735-36;
Div. Exs. 367, 108, 361); Infocall Communications Corp. ("INFE")
(Tr. 735-36; Div. Exs. 367, 109-11, 317, 356, 368); Lifeline
Biotechnologies, Inc., ("LBTI") (Tr. 736; Div. Exs. 121, 125,
359); Latin American Resources, Inc., ("LARI") (Div. Exs. 122-24,
316, 355); Metro Wireless Interactive Corp. ("MWTX") (Tr. 735;
Div. Exs. 367, 127, 363); and Twilight Productions, Ltd.,
("TWIP") (Tr. 736; Div. Exs. 134-36, 318, 360). Rimson & Co. made
a market in the common stock of CECO Environmental Corp.
("CECE"), which is traded on the Nasdaq Small Cap Market,. (Tr.
736; Div. Exs. 100-07, 358.)
C. The Shindman Group
Throughout 1994 and 1995, Shindman and his group of
unregistered salesmen, known as the Shindman group," engaged in
activities concerning a number of speculative stocks, including
LARI, TWIP, INFE, LBTI, CECE, and BTLI. (Tr. 305-07, 339-40,
734-36.) Shindman brought with him to Rimson & Co. a number of
salesmen, as well as several clerical assistants, and ran a
boiler-room operation in Rimson & Co.'s boardroom. (Tr. 724-34,
749, 612-20, 1308-10, 3135.) These salesmen and clerical
assistants were not paid by Rimson & Co. (Tr. 724-34, 750.)
They identified themselves to Rimson & Co. employees as employees
of Shindman (Tr. 3145.) and Rimson & Co. employees would refer
to them as "Mr. Shindman['s] guys." (Tr. 3143.) Moshe Rimson
himself identified them to other Rimson & Co. employees as "Alex
[Shindman]'s guys." (Tr. 3146.)
Shindman interacted with his group of salesmen "all the
time." (Tr. 3134.) Shindman visited the boardroom at least
twice a day, meeting with his group of salesmen, and there was
constant contact between his salesmen and the clerical assistants
working with, and around, Shindman in or near his office. (Tr.
749, 3135-36.) At other times, when Shindman was in his office,
which was just three feet from the boardroom (Tr. 2729-31),
==========================================START OF PAGE 12======
these salesmen would come to speak with Shindman. (Tr. 3135,
3164.) At times, there were as many as thirty unregistered
salesmen working for Shindman in the boardroom. (Tr. 725, 734,
107-08, 122, 127-28, 161-64, 200; Div. Ex. 1.)
Shindman's salesmen cold-called prospective customers,
falsely identified themselves as "Alex Shindman," and solicited
purchases of speculative securities using high pressure sales
tactics and scripted sales pitches containing baseless price
predictions and other material misrepresentations. (Tr. 617,
342, 728, 731-32, 741, 754-56, 1309-10, 1314-15, 3127-29, 3133,
3136-37, 3139.) In addition, the salesmen were often abusive and
profane in their dealings with customers and prospective
customers. (Tr. 3137-38.) Barry Wilson, formerly Rimson & Co.'s
financial operations principal, witnessed the sales practices of
Shindman's group of unregistered salesmen during 1994 and 1995.
(Tr. 725, 734, 749.) Almost every time he had occasion to visit
the boardroom, Wilson heard and observed up to thirty
unregistered salesmen cold-calling prospective customers, falsely
identifying themselves as "Alex Shindman," and using high
pressure sales tactics to solicit transactions in various
speculative securities, including LBTI, TWIP, and BTLI. (Tr.
728-34.)
These salesmen used sales scripts (such as Div. Ex. 16), and
Wilson heard the salesmen in the boardroom reciting the scripts
verbatim to customers. (Tr. 342-44, 731-32.) The scripts
contained baseless price predictions and other material
misrepresentations and omissions concerning the speculative
stocks being sold. (See, e.g., Div. Ex. 16.) In addition,
Shindman's salesmen participated in an incentive program that was
used to encourage selling activity. (Tr. 3134, 3167-68.) On
several occasions, Wilson told Shindman that Shindman's
unregistered salesmen in the boardroom were impersonating him,
warned Shindman that such activity was wrong and unlawful, and
advised Shindman that he was taking an excessive risk in allowing
it to happen. (Tr. 729-30.) Shindman showed absolutely no
concern or emotion upon hearing that his employees were
impersonating him. (Tr. 731.) Despite Wilson's warnings, the
activities of Shindman's unregistered salesmen paused only
briefly, to resume all over again, unmitigated. (Tr. 731.) In
addition, on several occasions, Wilson similarly notified Rimson
of the wrongful activities of Shindman's group, and Rimson told
Shindman to go to the boardroom and have his people "cool it"
because their activities had gotten "out of hand." (Tr. 337-38,
731.) The Shindman group's activities continued nevertheless.
(Tr. 731.)
During his entire period of employment at Rimson & Co.,
Shindman worked in close physical proximity to his group of
unregistered salesmen, and constantly interacted with them.
During his first period of employment at Rimson & Co., from
==========================================START OF PAGE 13======
approximately June 1993 through April 1994, Shindman sat in the
boardroom amongst his salesmen. (Tr. 2627-28, 2741-42; Div. Ex.
1.) While working along with these individuals, Shindman could,
and did, listen to what they were saying on the phone to
customers and prospective customers. (Tr. 2858-59.) As
described below, four of the Division's customer-witnesses were
solicited by Shindman to purchase securities during this period.
Thereafter, Shindman briefly left Rimson & Co. to become
associated with W.B. McKee, a registered broker-dealer, and then
returned to Rimson & Co. in approximately July 1994. (Tr. 2627-
28; Div. Ex. 292.) Upon Shindman's return to Rimson & Co., up
until the time he left Rimson & Co. in December 1995, Shindman
occupied room number 7, a private office with a door just three
feet away from the entrance to the boardroom. Shindman's own
desk was right next to the door to the boardroom. (Tr. 2641-42,
2729-31, 2861, 2863; Div. Ex. 1.)
Shindman, and Shindman alone, hired, trained, compensated,
fired, and supervised the unregistered salesmen. (Tr. 2761-63,
3022.) Peter Collins, a Shindman customer, taped a telephone
conversation with him. (Div. Exs. 388A, 388B.) Collins called
Rimson & Co. and asked for Alex Shindman in order to inquire as
to why he had been instructed to remit payment for a stock
purchase to Emmet A. Larkin & Co., Inc. ( Larkin & Co. ), the
clearing firm for Rimson & Co. (Div. Exs. 388A, 388B.) In the
course of his phone call, Collins spoke to a woman whom Shindman,
at the hearing, identified as his wife. (Div. Exs. 388A, 388B;
Tr. 2774-75.) When Collins asked Shindman's wife for a quote on
LARI, she put him on hold and an individual identifying himself
as Alex picked up the phone and explained Larkin & Co. s
clearing function, answering Collins's specific question. (Div.
Exs. 388A, 388B.)
Unregistered salesmen who solicited purchases of securities
from customers filled out order tickets in which they inserted
Shindman's RR number: 104 (while Rimson & Co. was self-clearing)
or NR04 (after Larkin & Co. cleared transactions for Rimson &
Co.). (Tr. 2628-29, 3127, 3130-33.) An order ticket is the
document that Rimson & Co. salesmen used to record customers' buy
and sell orders, and consisted of three copies--white, pink, and
yellow. (Tr. 3123.) Shindman's unregistered salesmen submitted
these tickets to Hall (Tr. 3121-22, 3127, 3130-33.), who, as
Rimson & Co.'s purchase and sale clerk, was responsible for
processing order tickets. (Tr. 3121-22.) In processing order
tickets, Hall would routinely retain the white copy, discard the
yellow copy, and remit the pink copy to the broker whose RR
number was on the ticket. (Tr. 3123.) Thus, after processing
the order tickets filled out by the boardroom salesmen, Hall
delivered the pink copies of the order tickets to Shindman or his
assistant. (Tr. 3132-33.) On occasion, Shindman submitted
unexecuted order tickets, generated by the selling activity of
the boardroom salesmen, directly to Rimson. (Tr. 3139-40.) If a
==========================================START OF PAGE 14======
question arose with respect to one of these order tickets, Hall
announced in the boardroom that there was a problem with a
specific customer's order ticket. Even though the order ticket
reflected Shindman's name and RR number, one of the unregistered
salesmen would claim the ticket as his own and resolve the
problem. (Tr. 3129-31.) Similarly, for all of the new accounts
opened by the Shindman group of unregistered salesmen, new
account forms were falsely recorded under Shindman's name and RR
number. (Tr. 733-34.) When Wilson confronted Shindman with this
practice, Shindman was entirely unconcerned that accounts were
being opened under his RR number. (Tr. 734.)
Rimson & Co. created, maintained, and provided to Commission
examiners order tickets and new account forms that falsely
reflected the RR number or name of an RR who was not the
soliciting salesman when the salesman who actually solicited the
transaction was not licensed, registered, or approved in
accordance with NASD rules. (Tr. 280, 454-56, 541-54, 1298-1306;
Div. Exs. 63, 68-80, 212-21, 1401, 1403-04, 1429-30.) All of the
transactions effected by the Shindman group of unregistered
salesmen were executed under Shindman's name and RR number. (Tr.
733-34, 3127, 3130-33.)
The "Type 1" account system at Rimson & Co. was a system
whereby the firm made and kept new account forms which reflected
false customer addresses. (Tr. 281, 477-80; Div. Ex. 370.)
Using the "Type 1" account system, Rimson & Co. recorded false
customer addresses on new account forms and other account
documents to conceal from regulators the existence of unlawful
transactions with customers who resided in states where a
particular security had not been registered for sale, in states
where Rimson & Co. was not registered as a broker-dealer, or in
states that had revoked Rimson & Co.'s broker-dealer
registration. (Tr. 477-80; Div. Ex. 68.) After customer Charles
Burch's purchase of INFE, Shindman called Burch to obtain an
address in a state in which INFE was registered for sale, telling
Burch that "it would be desirable to have some geographic
diversity in the stock ownership." (Div. Exs. 380, 299-353; Tr.
1549-52.) During that conversation, Burch merely mentioned to
Shindman a thirty-year old address that he had had in Fort
Collins, Colorado, but Burch told Shindman that he no longer
lived there. (Div. Exs. 380, 300; Tr. 1549-52.) Shindman knew
that Burch lived in Pennsylvania, and that INFE was not
registered or approved for sale in Pennsylvania. (Tr. 2679-80.)
D. The Four Boiler Rooms
Moshe Rimson is the sole shareholder, sole director,
president, compliance officer, director of sales, and director of
trading at Rimson & Co., and there was no other person with
formally delegated supervisory authority. (Tr. 296-98, 337-39.)
From June 1993 to December 1995, Rimson & Co. was located in
==========================================START OF PAGE 15======
offices consisting of half a floor at 2 Rector Street in
Manhattan. (Div. Ex. 1.) Moshe Rimson's personal office was
centrally located just opposite the front entrance, adjacent to
the entrance to the back office area, and, at most, a two-minute
walk from the boardroom where the salesmen worked cold-calling
prospective customers. (Div. Ex. 1; Tr. 122-23, 831-32.)
Moshe Rimson was aware of four boiler-room operations. Many
of the stock sales which were generated by Scudiero and his
salesmen were processed under Rimson's RR number. Rimson knew
that Scudiero was a convicted felon and was barred from the
securities industry by the NASD, and that Scudiero's team
consisted of many unregistered salesman, including Iodice,
Aguirre, and Anthony Esposito. (Tr. 281-82, 300-03, 123-24, 128-
32.) Rimson also participated in Scudiero's arrangement by which
Scudiero paid undisclosed compensation to WECI salesmen.
Additionally, Rimson was involved in issuing checks payable to
customers which were misappropriated by Scudiero, Aguirre or
Girodet. (Tr. 351-72, 381; Div. Exs. 17-22.) Finally, Rimson
told a Rimson & Co. employee that Rimson & Co. would promote WECI
shares through Scudiero, and "everybody is going to make a lot of
money." (Tr. 311.)
Rimson & Co. became a market maker for JIND shares
approximately two days after a meeting between Mende and Moshe
Rimson about JIND. (Tr. 462-63.) Although Mende & Assoc.
operated from separate offices than Rimson & Co., from about
March 1993 to June 15, 1993, when Mende was approved by the NASD
as a Rimson & Co. RR, all JIND trades were executed under
Rimson's personal RR number. (Tr. 283-85, 454-56.) Mende &
Assoc. paid part of the salary for a sales assistant who worked
directly for Moshe Rimson and was responsible for servicing the
Mende & Assoc. accounts. (Tr. 1245-46, 459-62.) When opening
accounts for customers purchasing JIND securities, the Mende &
Assoc. salesmen filled out Rimson & Co. new account forms and
trade tickets. All Mende & Assoc. trade tickets were personally
delivered to Moshe Rimson. (Tr. 1230-31.) On one occasion,
Rimson instructed a Mende & Assoc. salesman on how to fill out
order tickets, including putting the initials "JM" on the ticket
to identify the source as Mende. (Tr. 1237-39.) Finally, Rimson
told a Mende & Assoc. customer, who was dropping off a check at
Rimson & Co.'s offices, that he (Rimson) knew Hickman and was
"expecting some good things from his group." (Tr. 1072-74.)
Moshe Rimson also allowed Shindman to operate a boiler-room
in Rimson & Co.'s offices. (Tr. 281, 731.) Shindman and his
group of thirty unregistered salesmen worked at Rimson & Co. for
over one year selling a variety of speculative securities.
Shindman's unregistered salesmen worked in the boardroom down a
short corridor from Rimson's office. (Tr. 283, 725-34.) The
sales generated by Shindman's salesmen, who falsely identified
themselves to investors as "Alex Shindman," were all recorded on
==========================================START OF PAGE 16======
Rimson & Co. order tickets and new account forms under Shindman's
name and Rimson & Co. RR number. (Tr. 733-34.)
Finally, Rimson was aware that Feyjin and Dantoni were
generating sales for Rimson & Co. (Tr. 288, 1481-82.) The
customer orders generated by Feyjin and Dantoni were faxed to
Shkilko, an RR at Rimson & Co., and the trades were then executed
by Rimson. These customers then became Rimson & Co. accounts.
(Tr. 288-90, 1430-31, 1450-51, 1476, 1486-91, Div. Ex. 283.)
Feyjin and Dantoni paid the salary of an assistant who worked
with Shkilko at Rimson & Co. and who serviced the accounts
generated by Feyjin and Dantoni for Rimson & Co. (Tr. 288, 1407-
08, 1431.) The assistant worked in an office about twenty feet
from Rimson's office, and Rimson had frequent conversations with
her concerning accounts and trades, although Moshe Rimson knew
that Rimson & Co. never paid her any compensation. (Tr. 1406-08,
1431, 1451-52.)
Despite the activities of these four boiler-room operations,
Moshe Rimson took no action to stop them. In addition, numerous
investors personally contacted Rimson with complaints about their
investments through Rimson & Co. Almost always, Moshe Rimson
failed to take any corrective action. (See, e.g., Tr. 1000-01,
1554; Div. Ex. 377.) However, in one instance Moshe Rimson told
a customer who telephoned with a complaint about Mende & Assoc.,
that Mende and Hickman had been fired from Rimson & Co., although
Moshe Rimson did not explain why they had been fired. (Tr. 1121-
22.)
1. The Scudiero Group
In or about March 1993, Scudiero approached Rimson with the
idea of using Rimson & Co. to promote WECI securities, and Rimson
agreed. (Tr. 307-11.) Because he was barred by the NASD and was
a convicted felon, Scudiero never became an RR at Rimson & Co.,
although a Form U-4 for Scudiero was prepared (though never
submitted to the NASD), and a personnel file was assembled. (Id.)
Moshe Rimson was aware of Scudiero's criminal and disciplinary
record while Scudiero worked at the firm. (Tr. 282, 309.) The
Scudiero boiler-room operation sold WECI securities to hundreds
of public investors. Moshe Rimson told an employee of Rimson &
Co. that it would promote WECI shares, and "everybody is going to
make a lot of money." (Tr. 311.) Moshe Rimson and Rimson & Co.
generated approximately $150,000 in revenue for Rimson & Co. from
the WECI sales. (Tr. 277, 282, 722.)
Rimson & Co. and Moshe Rimson willfully participated in, and
knowingly contributed substantial aid and assistance to, this
operation. Scudiero worked on the premises of Rimson & Co. for
approximately eight months; Moshe Rimson and Rimson & Co.
provided Scudiero with a private office, telephone extension,
Quotron machine, and a sales assistant (Tr. 281-82, 286, 315-25);
==========================================START OF PAGE 17======
and Scudiero functioned as a sales manager and supervisor of
Rimson & Co. salesmen. Scudiero was also directly involved in
soliciting transactions in WECI securities at Rimson & Co., and
he held himself out to customers as a Rimson & Co. RR. (Tr.
997.) Scudiero introduced several individuals to Rimson & Co.
who were to sell WECI securities on Rimson & Co.'s premises,
including Girodet, Aguirre, and Iodice. (Tr. 301.) In fact,
Scudiero's sales team was so large that it prompted Rimson to
move the firm's offices from 160 Broadway to larger quarters at 2
Rector Street in June 1993. (Tr. 312.) Forms U-4 were prepared
and submitted to the NASD for two of Scudiero's salesmen, Iodice
and Esposito. (Tr. 324-25.) The applications for registration
of Iodice and Esposito were rejected by the NASD and they never
became RR s at Rimson & Co., even though they solicited
transactions in securities at Rimson & Co. (Tr. 324-26; Div. Ex.
292.)
The Scudiero salesmen worked in Rimson & Co.'s boardroom on
a daily basis for several months. However, they were not
compensated directly by Rimson & Co., but, rather, were
compensated by Scudiero through the transfer to them of
securities and cash. (Tr. 286-87, 351-75.) The salesmen
received WECI stock from Scudiero by means of Letters of
Authorization ( LOAs ) transferring securities from Rimson & Co.
brokerage accounts owned or controlled by Scudiero to accounts
owned or controlled by the salesmen. (Tr. 286-87, 351-75.) LOA
transfers at Rimson & Co., in general and specifically with
respect to Scudiero's transfers, were personally approved by
Moshe Rimson. (Tr. 286-87, 354-55.) In addition, Scudiero paid
WECI salesmen cash compensation. Scudiero was seen approximately
four times per month returning from the bank with large amounts
of cash which he flaunted around the office before distributing
to the salesmen. (Tr. 352-53.) Although never approved as RRs
at the firm, Scudiero, Aguirre, and Iodice, along with numerous
other unregistered salesmen, solicited and effected sales of WECI
securities to customers. (Tr. 286, 324-26, 559-77, 627-65, 973-
91, 1010-34.) When completing order tickets, new account forms
and other account information, the unregistered salesmen used RR
numbers assigned to registered persons, sometimes with the
consent of the RR, sometimes not. In addition, signatures of RRs
were often forged on documents concerning accounts and
transactions with which the RRs were not involved in any way.
(Tr. 541-54, 1298-306; Div. Exs. 63, 68-80, 212-21.) Several
investors defrauded by the Scudiero boiler-room at Rimson & Co.
testified as to the material misrepresentations and omissions
which were made to them in connection with their purchases of
WECI securities, as well as other violations and abuses to which
they were subjected in their dealings with Rimson & Co.
Randy Schaeffer had an account at Rimson & Co. and his
broker was Aguirre. (Tr. 559.) In late February 1993, Aguirre
telephoned Schaeffer and recommended that he purchase WECI stock.
==========================================START OF PAGE 18======
(Tr. 562-63.) Aguirre made misrepresentations to Schaeffer,
including: the price prediction that WECI stock, which was
trading at $.50 per share, would go to $2 per share in no time
and to $3 per share by September 1993 (Tr. 563); and that WECI
was profitable, although WECI had never reported a profit. (Tr.
564-65; Div. Ex. 138 at 3-4, 143 at F3-F4, 314, 320, 364.)
Aguirre failed to tell Schaeffer: that WECI was a speculative
stock; that WECI had lost money in every fiscal quarter during
1992 and 1993 (Tr. 564; Div. Exs. 138 at 3-4, 143 at F3-F4, 314,
320, 364); and the amount of compensation Aguirre or Rimson & Co.
was receiving in connection with Schaeffer's purchase of WECI
shares. (Tr. 577-78.) As a result of Aguirre's recommendation,
in March 1993, Schaeffer purchased 40,000 shares of WECI at $.50
per share. (Tr. 566.)
Schaeffer never received a penny stock Customer Suitability
Statement or an Agreement to Purchase form in connection with his
purchase of WECI stock. (Tr. 569.) Schaeffer did not receive
monthly account statements from Rimson & Co. for six consecutive
months following his purchase of WECI stock. (Tr. 577.)
Schaeffer eventually transferred his WECI stock to another
broker-dealer and it was sold, resulting in a loss to Schaeffer
of at least $13,500. (Tr. 576.)
Dr. Ian Reynolds first heard of WECI when Aguirre telephoned
and recommended that Reynolds purchase WECI stock. (Tr. 627-28,
636.) Aguirre predicted that Reynolds could buy WECI stock at $1
per share in a private placement, and thereafter make $25,000 on
the deal. (Tr. 636.) Aguirre omitted to state to Reynolds: that
WECI was a speculative stock; that WECI was unprofitable in 1992
and 1993 (Tr. 637; Div. Exs. 138 at 3-4, 143 at F3-F4, 314, 320,
364); and the amount of cash compensation which Aguirre or Rimson
& Co. was to receive from any source in connection with
Reynolds's WECI trade. (Tr. 640.) Based on his conversations
with Aguirre, Reynolds instructed Aguirre to purchase 50,000
shares of WECI in the private placement at $1 per share. (Tr.
661.) Unbeknownst to Reynolds, his money was used to purchase
30,000 shares of WECI in the after market and not in a private
placement as Aguirre had represented. Reynolds never received a
Schedule 15G penny stock disclosure form from Rimson & Co., and
he did not receive monthly account statements for six months
following his purchase of WECI stock. (Tr. 640-41; Div. Ex. 82.)
Reynolds did not receive a penny stock Customer Suitability
Statement or an Agreement to Purchase form in connection with his
purchase of WECI stock. (Tr. 641-43, Div. Ex. 81.) The customer
signature on Reynolds's Rimson & Co. new account form is forged.
(Tr. 630; Div. Ex. 88.) Information on Reynolds's Rimson & Co.
new account form concerning Reynolds's bank, office telephone
number, and net worth is false. (Tr. 630.)
Three checks were drawn on Reynolds's Rimson & Co. account
without Reynolds's permission or knowledge. The amounts of the
==========================================START OF PAGE 19======
checks were $6,855.86, $14,350.00, and $29,892.50. The checks
were made payable to Reynolds. On the back of each check, the
endorsement signature purporting to be Reynolds's is a forgery.
(Tr. 398-408; Div. Exs. 25-27.) In addition, on June 7, 1993,
30,000 shares of WECI were sold from Reynolds's account at Rimson
& Co. without Reynolds's authorization or knowledge. (Tr. 652-
53, Div. Ex. 90.) Finally, 100 shares of American Cascade Energy
("American Cascade") were purchased in Reynolds account on July
9, 1993, without Reynolds's authorization or knowledge. These
shares were sold on July 27, 1993, also without Reynolds's
authorization or knowledge. (Tr. 665; Div. Ex. 90.) Reynolds
has never recovered any of the $51,098.36 misappropriated from
his Rimson & Co. account. (Tr. 648-51; Div. Exs. 25-27.)
Lee Deike is a retired computer programmer from Annandale,
Virginia. (Tr. 682-85.) Deike testified at the hearing
telephonically because he is a heart transplant patient who was
unable to travel to New York City for the hearing due to his poor
medical condition. (Tr. 683.) Deike opened an account at Rimson
& Co. in May 1993 when Girodet, his former broker at Hanover
Sterling, a now defunct broker-dealer, began working for Rimson &
Co. (Tr. 685-86; Div. Ex. 94.) In June 1993, Girodet called
Deike and recommended that Deike purchase WECI stock. (Tr. 692-
93.) Girodet stated that: WECI stock, which was then trading at
$1 1/4, would increase to $4 per share; Deike would double his
money by purchasing WECI; and once the price of WECI stock went
to $4 per share it would be listed on Nasdaq. (Tr. 692-93.)
Girodet omitted to state: that WECI stock was speculative; that
WECI was unprofitable in 1992 and 1993 (Tr. 694-95); and the
aggregate amount of cash compensation that Girodet or Rimson &
Co. would receive from any source in connection with Deike's WECI
trades. (Tr. 699, 710, 700.)
As a result of Girodet's solicitation, Deike agreed to
purchase 20,000 shares of WECI stock for a total purchase price
of $25,007.50. (Tr. 696-97; Div. Ex. 95.) In September 1993,
Deike agreed to make a second purchase of 10,000 WECI shares.
Prior to the second purchase of WECI stock, Girodet told Deike
that the price of WECI was going to increase to $4 per share. On
September 16, 1993, Deike purchased 10,000 shares of WECI at $2
3/4 per share. (Tr. 700-03, 705; Div. Ex. 95.) Deike never
received a Schedule 15G penny stock disclosure form. (Tr. 696,
705-06; Div. Ex. 82.) Deike did not receive a penny stock
Customer Suitability Statement or an Agreement to Purchase form
before he purchased WECI stock. (Tr. 706-07; Div. Ex. 96.)
Deike received a completed Customer Suitability Statement and
Agreement to Purchase form about a month after his second
purchase of WECI stock. The Customer Suitability Statement was
backdated to September 7, 1993, and Deike was asked to sign the
form and send it back to Rimson & Co. Deike refused to do so.
(Tr. 706-10; Div. Ex. 96.) Deike did not receive monthly account
statements from Rimson & Co. for six consecutive months following
==========================================START OF PAGE 20======
his purchase of WECI stock. He received Rimson & Co. account
statements on only a quarterly basis. (Tr. 700.) The address on
Deike's Rimson & Co. account statements is false and he never
lived at that address or gave anybody permission to send account
statements there. Deike complained to Girodet about the
incorrect address and Girodet said he would correct the address,
but Girodet never did so. (Tr. 713-14.)
In October 1993, Deike told Girodet to sell his WECI stock.
However, Girodet refused to do so and the WECI stock was never
sold. (Tr. 714-15.) Deike never received any of his $52,515
investment in WECI stock. (Tr. 715.) The following transactions
occurred in Deike's account at Rimson & Co. without his
authorization or knowledge: on July 7, 1993, 200 shares of
American Cascade were purchased and then removed that same day;
on July 8, 1993, 1,700 shares of WECI were sold; on July 14,
1993, 4,000 shares of WECI were sold; on October 18, 1993, 10,000
shares of AGP & Co. Inc. were purchased; and, on December 6,
1993, 10,000 shares of AGP & Co. Inc. were sold. (Tr. 703-05,
Div. Ex. 95.)
In March 1993, Girodet telephoned John Rock and recommended
that Rock purchase WECI stock. (Tr. 844-46.) Rock opened two
accounts at Rimson & Co. in May 1993. (Tr. 842-44.) Girodet
made the price prediction that Rock would double his money almost
immediately. (Tr. 844-46.) Girodet omitted to state: that WECI
was a speculative stock; that WECI was unprofitable in 1992 and
1993; and the aggregate amount of cash compensation that Girodet
or Rimson & Co. would receive from any source in connection with
Rock's WECI transactions. (Tr. 848.)
As a result of his conversations with Girodet, in early
1993, Rock agreed to purchase 20,000 shares of WECI at $0.50 per
share. (Tr. 874, 848, 868-69; Div. Ex. 153.) Rock also agreed
to purchase 35,000 additional shares of WECI stock on May 19,
1993. (Tr. 850-51, 864-65; Div. Ex. 153.) Rock told Girodet to
sell all of his WECI stock in July 1993, and he called Girodet
every day thereafter and told him to sell. However, Girodet
would not execute Rock's order to sell the WECI stock. It was
not until October 1993 that Girodet sold some of Rock's WECI
stock. Even though Rock wanted Girodet to sell all of the WECI
stock, Girodet only sold 10,000 shares. The 10,000 shares of
WECI were sold at $2 1/2 per share. (Tr. 853-54; Div. Ex. 155.)
Rock still owns 21,000 shares of WECI, which are worthless. (Tr.
855, 883-84; Div. Exs. 155, 364.) In addition, on July 23, 1993,
3,000 shares of American Cascade were purchased in Rock's Rimson
& Co. account without Rock's permission. (Tr. 879; Div. Ex.
154.)
Rock never received a Schedule 15G penny stock disclosure
form. (Tr. 866-67; Div. Ex. 82.) Rock did not receive a penny
stock Customer Suitability Statement or an Agreement to Purchase
==========================================START OF PAGE 21======
form before he purchased the WECI stock. (Tr. 866-67; Div. Ex.
81.) Rock did not receive monthly account statements from Rimson
& Co. for six consecutive months following his purchase of WECI
stock. He received Rimson & Co. account statements on only a
quarterly basis. (Tr. 848-49.) The address on Rock's account
statements is false. Girodet told Rock that Rock would have to
use an out-of-state address if Rock wanted to participate in the
WECI offering because the stock was not registered for sale in
Pennsylvania. (Tr. 861-62.)
At the end of 1993, Rock discovered that two checks were
written on his Rimson & Co. account which he did not authorize.
One check was for $16,096.38, made payable to John and Mary Rock
and dated August 9, 1993, and the second check was for $2,820,
made payable to Mary Rock and also dated August 9, 1993. Neither
Rock nor his wife ever received the funds from these checks. The
first time Rock saw these two checks was when the Commission's
staff or NASD faxed them to Rock in April 1994. The endorsements
that appear on the back of the checks are forgeries of Rock's and
his wife's signatures. (Tr. 855-57, 891-95, 395-98; Div. Exs.
23, 24.)
Raymond Spera is 40 years old and lives in Horsheham,
Pennsylvania. His primary source of income is Social Security
Disability which he began receiving in August 1992. Other than
Social Security Disability benefits, Spera had no other income in
1993. (Tr. 973-74.) Iodice telephoned Spera in the beginning of
September 1993 and suggested that Spera purchase about $10,000
worth of a stock called PureTech. (Tr. 974-76.) As a result of
Iodice's solicitation, Spera opened an account at Rimson & Co.
and purchased 50 shares of PureTech for $972.50. (Tr. 976-77,
983-84; Div. Ex. 151.)
A few weeks after Spera purchased the PureTech stock, Iodice
told Spera that he no longer owned PureTech and, instead, Spera
now owned 500 shares of WECI. (Tr. 977.) Spera never authorized
the sale of PureTech shares or the purchase of the WECI stock.
(Tr. 978.) The purchase price for the WECI stock exceeded the
sales proceeds for the PureTech stock by $550. Iodice,
therefore, asked Spera to send in the difference. Because Spera
never sent in additional money, 200 shares of WECI were sold
without his permission on October 20, 1993, for a total of
$542.50. (Tr. 990; Div. Ex. 165.) Iodice stated that WECI's
stock price was going to double or triple in the next month.
(Tr. 977-78.) Iodice omitted to state: that WECI was a
speculative security (Tr. 979); that WECI was unprofitable in
1992 and 1993 (Tr. 979); and the amount of cash compensation that
Iodice or Rimson & Co. would receive in connection with Spera's
purchase of WECI stock. (Tr. 980.) In addition, on September
10, 1993, 50 shares of U.S. Banknote stock were purchased in
Spera's Rimson & Co. account without Spera's permission or
knowledge. The 50 shares of U.S. Banknote were removed from
==========================================START OF PAGE 22======
Spera's account the same day without his authorization or
permission. (Tr. 984-85; Div. Ex. 151.)
Spera never received a Schedule 15G penny stock disclosure
form. (Tr. 979-80; Div. Ex. 82.) Spera's Rimson & Co. new
account form falsely lists Spera's occupation as a policeman.
The new account form also falsely lists Spera's investment
objective as speculation. (Tr. 981-82; Div. Ex. 151.) Spera did
not receive monthly account statements from Rimson & Co. for six
consecutive months following his purchase of WECI stock. (Tr.
980.) Spera never received an Agreement to Purchase form or a
Customer Suitability Statement from Rimson & Co. in connection
with the purchase of WECI stock. (Tr. 986; Div. Ex. 81.) On
November 30, 1993, the remaining 300 shares of WECI were sold
with Spera's permission for $517.50. Shortly thereafter, a check
was sent to Spera for $549.22 and Spera's account was closed.
Spera lost a total of $423.28 in his account at Rimson & Co., and
that loss remains outstanding. (Tr. 990-91; Div. Ex. 165.)
Victor Priolo became a shareholder in Fred Warner Capital,
Inc., in 1989 or 1990, which merged with WECI in 1992. As part
of the merger, Priolo obtained 36,000 shares of WECI and an IOU
for 14,000 additional shares. The 36,000 shares of WECI which
Priolo received consisted of two stock certificates, one
certificate for 30,000 shares and one for 6,000 shares. (Tr.
994-96.) In April 1993, Scudiero telephoned Priolo and asked if
Priolo would like to sell 30,000 shares of WECI. Scudiero told
Priolo that WECI was going public and that Scudiero would be able
to sell the WECI shares for $.50 per share. (Tr. 996-97, 1002.)
Scudiero also told Priolo that he worked for Rimson & Co. (Tr.
997.)
As a result of his conversation with Scudiero, Priolo mailed
his certificate for 30,000 shares of WECI to Scudiero at Rimson &
Co. and instructed Scudiero to sell the shares. (Tr. 997.) In
May 1993, Priolo received a check for $13,200 drawn on an account
at Bayside Federal Savings Bank, Scudiero's personal bank. (Tr.
383-86, 390-94.) Priolo assumed that the check represented the
proceeds from his sale of WECI stock at $.50 per share, minus
commissions. (Tr. 998-99, 1001-02; Div. Ex. 166.) However, in
July or August 1993, Priolo received an account statement from
Rimson & Co. which stated that the 30,000 shares of WECI had been
sold for $29,992.50. The account statement also stated that a
check had been written on Priolo's account for $29,992.50. (Tr.
998, 1003-05; Div. Ex. 167.) The $29,992.50 check had been made
payable to Priolo's wife, Beverly Demone, and was deposited in
Scudiero's bank account at Bayside Federal Savings Bank. (Tr.
383-86, 390-94.) Beverly Demone's endorsement on the back of the
$29,992.50 check is a forgery and no one at Rimson & Co. was
authorized to sign her name to checks. (Tr. 999, 1005-08; Div.
Ex. 22.)
==========================================START OF PAGE 23======
Priolo telephoned Moshe Rimson to complain about Scudiero,
and Rimson told Priolo that Scudiero did not work at Rimson & Co.
Priolo then asked who his broker was if it was not Scudiero and
Rimson responded, "I guess I am." However, Priolo had never
spoken to Rimson before. (Tr. 1000-01.) Rimson told Priolo that
the problem was between Scudiero and Priolo, and Rimson did not
take any other steps to investigate or resolve Priolo's
complaint. (Tr. 1001.) Priolo has never recovered the
$16,792.50 difference between the two checks, which represents
the amount which Scudiero misappropriated. (Tr. 999, 1007.)
Richard Canham is a retired mailman who lives in Mill
Valley, California. (Tr. 1010.) In September 1993, Canham
opened a brokerage account at Rimson & Co. as a result of a
telephone call he received from Iodice, who held himself out as
an RR at Rimson & Co. (Tr. 1010-11.) Within a week of opening
the account, Iodice solicited Canham to purchase stock in WECI.
Iodice stated that WECI was going to be listed on Nasdaq in one
to two weeks and that once WECI commenced trading on Nasdaq, the
price of WECI would double. (Tr. 1012-14.) Iodice failed to
tell Canham that: WECI was a speculative stock (Tr. 1014-15);
WECI was unprofitable in 1992 and 1993; and Iodice or Rimson &
Co. would receive an amount of cash compensation from a source in
connection with Canham's purchase of WECI shares. (Tr. 1019.)
Canham never received a Schedule 15G penny stock disclosure
form. (Tr. 1017-18; Div. Ex. 82.) Canham did not receive
monthly account statements from Rimson & Co. for six consecutive
months following his purchase of WECI stock. Canham received
statements from Rimson & Co. on a quarterly basis, and Canham
actually received only a total of two statements from Rimson &
Co. (Tr. 1019-20.) Canham never received a penny stock Customer
Suitability Statement or an Agreement to Purchase form in
connection with his purchase of WECI. (Tr. 1024; Div. Ex. 81.)
Canham's account statements also had a false New York address
printed on them, which is Iodice's home address. (Div. Exs. 70,
292.) Those statements were always enclosed in envelopes that
had Canham's correct California address hand written on them.
Canham asked to have his address corrected on several occasions
but it was never corrected. (Tr. 1020-24; Div. Ex. 70 at 7.)
Canham's new account form also lists a false address, telephone
number, and occupation for Canham. In addition, Canham's
signature in the box for customer signature on the new account
form is a forgery. (Tr. 1021-23; Div. Ex. 70 at 1.) As a result
of Iodice's solicitation, in late September 1993, Canham agreed
to purchase 2,000 shares of WECI at $2.75 per share. (Tr. 1018-
19.) All 2,000 shares of Canham's WECI stock were sold at $3/16
per share for a total of $375. (Tr. 1032-33.) Canham lost a
total of $5,132.50 through his investment in WECI. He has never
recovered any of this loss. (Tr. 1034; Div. Ex. 70 at 7.)
2. The Mende & Associates Group
==========================================START OF PAGE 24======
In early 1993, Mende formed Mende & Assoc. as a New York
corporation, acquired office space in lower Manhattan, recruited
and hired a sales force of approximately ten young and
inexperienced "broker trainees," most of whom were unlicensed,
and began operating as an unregistered broker-dealer. (Tr. 1186-
89.) Hickman was an officer and co-owner of Mende & Assoc., and
was designated and functioned as the Director of Retail Sales.
(Tr. 1197.) Hickman recruited at least eight salesmen and he
supervised all sales activities for the entire period of Mende &
Assoc.'s operation as an unregistered broker-dealer. (Tr. 1186-
87.) During this period, Hickman was listed on the NASD's CRD as
being associated with Rimson & Co., though not approved as an RR.
(Div. Exs. 186, 199, 292.) Mende and Hickman implemented and
enforced a rigorous high pressure boiler-room sales program.
(Tr. 1199-202.) Hickman provided the salesmen with customer lead
cards and instructed them constantly to dial the telephone and
sell securities. (Tr. 1188, 1198-99.) Mende and Hickman
required the unlicensed salesmen to identify themselves falsely
as "Jonathan Mende" or "Todd Hickman from Jonathan Mende &
Associates," and they did so. (Tr. 1203, 1223-25.) Mende and
Hickman instructed the salesmen to tell customers that JIND
securities would increase to $6 and then to $8 per share within a
six to nine month period at a time when customers were purchasing
the securities for approximately $3 per share or less. (Tr.
1202.) The salesmen knew little about the issuer of these
securities, and had no reasonable basis to predict such an
increase in the share price of this highly speculative security.
(Div. Exs. 314, 320, 364, 367.) The salesmen each made between
200-300 calls per day, and they made the price predictions as
required by Mende and Hickman. (Tr. 1204.)
Mende and Hickman also instructed the salesmen to tell
customers that JIND securities would become listed on Nasdaq or
the American Stock Exchange ("AMEX") within a period of months,
and the salesmen all made this statement as part of their sales
pitch. (Tr. 922-23, 1068, 1202.) In connection with the
solicitations of transactions in JIND securities, Mende & Assoc.
sent to customers written materials containing false and
misleading information. Among the materials was a chart printed
on a "Jonathan Mende & Associates" form purporting to show a 17-
year investment performance of 4,265% for an equity portfolio
managed by "Donald Chiras, Ph.D., Research Analyst," compared
with 834% for the Value-Line composite index. (Tr. 908-10; Div.
Ex. 157.) This chart and a cover letter which was sent with it
falsely identified Donald Chiras as a research analyst for Mende
& Assoc. when, in fact, Chiras has never had any such
association. (Tr. 1214, 1216-17; Div. Ex. 207.) Accompanying
this chart was a similarly printed Mende & Assoc. form purporting
to show information about JIND. This form falsely states that
JIND had 1992 revenues of $5 million, with net income of $1
million, and 1993 revenues of $8 million, with net income of $1.5
million. (Tr. 908-10; Div. Ex. 157.) In fact, for 1992, JIND
==========================================START OF PAGE 25======
had no revenues and a net loss of $63,000, and, for 1993, JIND
had gross revenues of $1.2 million, with a net loss of $400,000.
(Div. Exs. 112-16, 314, 320-22, 365.)
Hickman and Mende expressly instructed the salesmen not to
tell the customers that JIND was "speculative" or a "penny
stock." (Tr. 1208-09.) JIND stock was both. (Tr. 274-75; Div.
Ex. 367.) JIND was a small, unprofitable company traded on the
OTCBB, and was a penny stock within the meaning of the Exchange
Act. (Tr. 274-75; Div. Exs. 314, 320-22, 365.) Hickman
insisted that customers never be told the inside bid price of the
securities. (Tr. 1208.) While one salesman was preparing a
packet of written materials on JIND to be copied and sent to
customers, Mende reviewed it first and removed and destroyed
several pages containing actual financial information on the
company. (Tr. 1211-12; Div. Ex. 206.)
All compensation received by Mende & Assoc. and its salesmen
was paid by a consultant or promoter for JIND. (Tr. 1206, 1217-
18.) The salesmen received a salary of $200 per week, plus
additional payments for selling JIND securities to customers.
(Tr. 1217-18.) The source and amount of the compensation
received by salesmen were never disclosed to customers. (Tr.
1208.)
Based on verbal information provided by Mende to a certified
public accountant, financial statements for Mende & Assoc. were
prepared in May 1993 which reflect that Mende & Assoc. had: (1)
earned $137,636 in commissions through the sale of securities
from its inception on March 1, 1993, to May 15, 1993; (2) $66,270
in commissions paid or payable to its sales representatives; (3)
retained earnings and net income from operations of $44,665; and
(4) $38,403 of cash in the bank. In addition, the notes to the
financial statements state that the firm leased office space at
26 Broadway in New York City for $3,300 per month. The notes
also describe the nature of the business as "Investment Banking
activities with sale of securities" and operation "as a broker
Dealer [sic] on the Nasdaq exchange [sic]." (Tr. 941, 957-67;
Div. Exs. 158, 163.)
Rimson & Co. and Moshe Rimson were integral to Mende &
Assoc.'s operation. They provided substantial aid and assistance
to it and they profited by receiving a markup on transactions in
JIND securities generated by Mende & Assoc. (Tr. 283-85, 454,
462-63.) Mende submitted a Form U-4 to Rimson & Co. in May 1993,
and was approved by the NASD as a Rimson & Co. RR from June 15,
1993, until his voluntary termination on December 14, 1993. (Tr.
455-56; Div. Ex. 188.) During his period of formal employment by
Rimson & Co., Mende was almost never physically on the premises
of Rimson & Co. because he was operating his own firm, i.e. Mende
& Assoc., a few blocks away. (Tr. 454-55.) However, Rimson &
Co. executed all of the trades in JIND securities for Mende &
==========================================START OF PAGE 26======
Assoc.'s customers; the customers' accounts were opened using the
same Rimson & Co. documents as accounts opened by Rimson & Co.'s
brokers; Rimson & Co. maintained files for these customer
accounts; Moshe Rimson personally was the trader who made a
market in JIND securities; and, prior to June 15, 1993, when
Mende was approved as a Rimson & Co. RR and received RR number
101 at Rimson & Co., the JIND trades were executed under RR
number 01, Moshe Rimson's number. (Tr. 283-85, 454-56.) In
addition, Mende & Assoc. reimbursed Rimson & Co. for the cost of
processing the Forms U-4 for Mende and his salesmen. (Tr. 284.)
Mende & Assoc. also paid part of the salary for a sales
assistant, Catherine Hoffman, who worked directly for Rimson and
was responsible for servicing the Mende & Assoc. accounts. (Tr.
1245-46, 459-62.)
Mende and Hickman told the Mende & Assoc. salesmen that
Mende & Assoc. would be a "satellite office" of Rimson & Co.
until Mende & Assoc. obtained its own broker-dealer registration.
(Tr. 1188-93.) Each of the Mende & Assoc. salesmen was
instructed to complete a Form U-4 designating Rimson & Co. as the
employer, and not to indicate Mende & Assoc. on the Form U-4
because the firm was not yet registered as a broker-dealer. (Tr.
1190-93, 458-59.) When opening accounts for customers purchasing
JIND securities, the Mende & Assoc. salesmen filled out Rimson &
Co. new account forms and trade tickets, and Mende & Assoc.
messengered these documents to Rimson & Co. several times per
week. (Tr. 1228-31.) The trade tickets were personally
delivered to Rimson. (Tr. 1230-31.) On at least one occasion,
Rimson carefully instructed one of the Mende & Assoc. salesmen on
how to fill out order tickets, including putting the initials
"JM" on the ticket to identify the source as Mende. (Tr. 1237-
39.)
Customers of Mende & Assoc. were told that Rimson & Co. was
the "clearing agent." A Mende & Assoc. pre-confirmation form
letter directed customers to make checks payable to Rimson & Co.,
and the letter was sent to customers with an envelope pre-
addressed to Rimson & Co. for customers to use in sending their
checks. (Tr. 1097-116; Div. Ex. 7.) Rimson & Co. never paid any
salary, commissions, or other compensation to Mende, Mende &
Assoc., or its salesmen, notwithstanding that numerous trade
tickets for JIND securities were given to Moshe Rimson by Mende
and his salesmen. (Tr. 285.) However, Rimson & Co. received
markups on its trading in JIND securities. (Tr. 285, 1244.)
Rimson & Co. received approximately $20,000 of revenue from sales
of JIND shares generated by Mende & Assoc. (Tr. 278, 723.)
Mende complained to his salesmen that Rimson's percentage was too
large. (Tr. 1245.)
William Brinkmann of Champaign, Illinois, first heard of
JIND on May 19, 1993, when a person who identified himself as
Todd Hickman telephoned him and recommended JIND stock. (Tr.
==========================================START OF PAGE 27======
901.) Hickman stated that: he expected that JIND would be
listed on the Nasdaq within a few months which, when combined
with expected increases in revenue, would cause JIND's stock
price to increase from $3 per share to $6 per share (Tr. 902-03);
and an analyst named Chiras was recommending JIND stock. (Tr.
903.) Hickman omitted to state: that JIND was a speculative
stock; that JIND was a penny stock; that there was a spread
between the bid and ask prices of JIND stock; and how much
compensation Hickman and his firm would earn on Brinkmann's
trade. (Tr. 903-04.) Finally, Hickman provided Brinkmann with a
document on Mende & Assoc. letterhead which falsely stated that
JIND had revenues of $5 million and $8 million and net income of
$1 million and $1.5 million during 1992 and 1993, respectively.
(Div. Exs. 314, 320-22, 157 at 3; Tr. 908-10.) Based upon
Hickman's recommendation, on May 19, 1993, Brinkmann purchased
1,000 shares of JIND at $3 per share. Thereafter, Brinkmann sent
a check in the amount of $3,007 to Rimson & Co. which was made
payable to Rimson & Co. (Tr. 904, 918-19; Div. Ex. 148 at 5.)
Brinkmann never received a Schedule 15G penny stock
disclosure form. Tr. 906; Div. Ex. 82.) Brinkmann never
received a penny stock Customer Suitability Statement or an
Agreement to Purchase form in connection with his purchase of
JIND stock. (Tr. 913-17; Div. Ex. 148 at 2a-3b.) The Customer
Suitability Statement for Brinkmann, which was maintained in
Rimson & Co.'s files, misspells his name, falsely lists his
marital status as single, falsely lists his annual income as over
$200,000, falsely lists his investment objective as speculation,
falsely lists his trading frequency as 3 times a month, and
falsely lists the dollar amount of his average trade as $10,000.
(Tr. 914-17, 818-24; Div. Ex. 148 at 2a-3a.) Additionally, the
Customer Suitability Statement for Brinkmann which was maintained
in Rimson & Co.'s files is dated May 14, 1993, five days before
Brinkmann was first contacted by Hickman about JIND. Further,
Brinkmann's signature is forged on the Customer Suitability
Statement. (Tr. 915-17, 818-24; Div. Ex. 148 at 3a.) Similarly,
Brinkmann's signature is forged on the Rimson & Co. Agreement to
Purchase form for Brinkmann which was maintained in Rimson &
Co.'s files. (Tr. 917, 818-24; Div. Ex. 148 at 3b.) In
addition, Brinkmann received a confirmation reflecting his
purchase of JIND shares which falsely stated that Brinkmann's
purchase order was unsolicited. (Tr. 918; Div. Ex. 148 at 5.)
Brinkmann sold his JIND stock for $1.75 per share in May 1994,
resulting in a $1,250 loss. (Tr. 922-25.)
Nochum Grund, an ordained rabbi who resides in Brooklyn, New
York, first heard of JIND during June 1993 (Tr. 1067), when a
person who identified himself as Todd Hickman of Rimson & Co.
called him and recommended JIND stock. (Tr. 1068.) Hickman told
Grund that JIND would be listed on the AMEX within four weeks,
which would cause JIND's stock price to increase from $3 per
share to $8 per share. (Tr. 1068-69.) Hickman omitted to state:
==========================================START OF PAGE 28======
that JIND was a penny stock; the amount of commission which
Hickman would earn on the transaction; how much Rimson & Co.
would receive in compensation on Grund's trade (Tr. 1070-71); and
that JIND had reported net losses for all fiscal periods during
1992 and 1993. (Tr. 1090-91; Div. Exs. 314, 320-22.)
Based upon Hickman's recommendation, on June 11, 1993, Grund
purchased 1,000 shares of JIND at $3 1/8 per share. (Tr. 1071.)
Grund paid for his purchase by visiting Rimson & Co.'s offices on
Rector Street in Manhattan and handing a check to Moshe Rimson.
Rimson told Grund that he knew Hickman and was "expecting some
good things from his group." (Tr. 1072-74.) Based upon
Hickman's recommendation, on August 24, 1993, Grund purchased an
additional 500 shares of JIND at $3 1/8 per share. (Tr. 1083-85;
Div. Ex. 149 at 10.)
Grund never received a Schedule 15G penny stock disclosure
form from Rimson & Co. (Tr. 1071-72; Div. Ex. 82.) Grund never
received a penny stock Customer Suitability Statement or an
Agreement to Purchase form in connection with his purchase of
JIND stock. (Tr. 1078.) The Customer Suitability Statement for
Grund, which Rimson & Co. maintained in its files in connection
with Grund's initial transaction, misspells Grund's name, falsely
lists his marital status as single, falsely lists his net worth
as between $500,000 to $1,000,000, and falsely represents his
trading frequency and the average dollar amount of his trades.
(Tr. 1077-79, 818-24; Div. Ex. 149 at 3a-4a.) Additionally, the
Customer Suitability Statement is dated May 28, 1993, at least
one week before Grund was first contacted by Hickman about JIND.
Grund's signature is forged on the Customer Suitability Statement
relating to Grund's first two transactions. (Tr. 818-24, 1079-
80, 1085; Div. Ex. 149 at 4a, 6a.) Grund's signature is also
forged on the Agreement to Purchase forms in connection with
Grund's first two transactions. (Tr. 818-24, 1080, 1085-86; Div.
Ex. 149 at 4b, 6a.) Finally, Grund's signature also is forged on
the new account form which Rimson & Co. maintained in its files
and it is dated May 26, 1993, at least one week before Grund had
ever heard of JIND. (Tr. 818-24, 1075-78; Div. Ex. 149 at 1.)
Grund did not receive monthly account statements from Rimson &
Co. after September 1993. (Tr. 1081; Div. Ex. 148 at 11-12.)
Grund sold his JIND stock for $2 1/8 per share, resulting in a
$1,500 loss to Grund. (Tr. 1088-89.)
Ernest Swift, who is 67 years old and from Palestine, Texas
(Tr. 1092-93), first heard of JIND on June 25, 1993, when a
person who identified himself as Todd Hickman of Rimson & Co.
telephoned Swift and recommended JIND stock. (Tr. 1094.)
Hickman told Swift that he expected that JIND shares would "be
going up two or three points within a very short time." (Tr.
1094.) Hickman omitted to state: the spread between the bid and
ask prices for JIND shares (Tr. 1095); that JIND was a penny
stock; how much commission Hickman would earn on Swift's trade;
==========================================START OF PAGE 29======
how much compensation Rimson & Co. would receive on a transaction
by Swift (Tr. 1095-96); and that JIND had reported net losses for
all fiscal periods during 1992 and 1993. (Tr. 1128-29; Div. Exs.
314, 320-22.) Based upon Hickman's recommendation, on June 28,
1993, Swift purchased 2,900 shares of JIND at $3 3/8 per share.
Thereafter, Swift sent a check in the amount of $9,795 to Rimson
& Co., in a pre-paid Federal Express package provided to Swift by
Rimson & Co. (Tr. 1097, 1116; Div. Ex. 147 at 5.)
Swift never received a Schedule 15G penny stock disclosure
form. (Tr. 1096; Div. Ex. 82.) On June 30, 1993, Swift received
a penny stock Customer Suitability Statement from Rimson & Co.,
which he completed and sent back to Rimson & Co. On the form,
Swift listed, among other things, that his investment adviser was
Todd Hickman of Rimson & Co. Additionally, the form which Swift
received was pre-dated June 28, 1993. (Tr. 1102-04; Div. Ex. 168
at 1-3.) At no time did Swift ever cross out Todd Hickman's name
from Swift's Customer Suitability Statement or change the date on
the form from June 28, 1993, to June 21, 1993. (Tr. 1106, 1114-
15; Div. Ex. 147 at 2b & 3a.) The document was altered by Rimson
& Co. to reflect a date of June 21, 1993, kept in Rimson & Co.'s
files, and ultimately produced to Commission examiners. (Tr.
280, 826; Div. Exs. 146, 147.) Swift completed a Rimson & Co.
Agreement to Purchase form in connection with his purchase of
JIND shares. The agreement which Swift sent to Rimson was dated
June 28, 1993. However, the version of the agreement which
Rimson & Co. maintained in its files was dated June 21, 1993,
four days before Swift was first contacted by Hickman. (Tr.
1115, 818-24; Div. Exs. 168 at 4, 147 at 3b.) Swift received
only one account statement from Rimson & Co. (Tr. 1116-17; Div.
Ex. 147 at 8.)
During September 1993, Swift ordered Rimson & Co. to sell
his shares. (Tr. 1117-20; Div. Ex. 169.) On September 22, 1993,
a person who identified himself as Jonathan Mende of Rimson & Co.
telephoned Swift. Mende told Swift that JIND was a good stock
which would go up in price and that he should hold onto it for
another 30 days. (Tr. 1120.) Thereafter, Swift contacted Moshe
Rimson. Rimson told Swift that both Mende and Hickman had been
fired from Rimson & Co. (Tr. 1121-22.) In late December 1993,
Swift sold his JIND stock for a total of $4,700, resulting in a
loss of approximately $5,000. (Tr. 1122-23.)
Thomas Bright of Shippensburg, Pennsylvania, first heard of
JIND on May 19, 1993, when a person who identified himself as
Todd Hickman called him on the telephone and recommended JIND
stock. (Tr. 1269-70.) Hickman made price predictions to Bright
and told him that JIND would be listed on the Nasdaq within 30 to
60 days. (Tr. 1271-72.) Hickman omitted to state: that JIND
was a speculative stock; that JIND was a penny stock; the spread
between the bid and ask prices of JIND stock; how much commission
Hickman would earn on Bright's trade; how much Hickman's firm
==========================================START OF PAGE 30======
would earn on Bright's trade; and that JIND had reported net
losses for all fiscal periods during 1992 and 1993. (Tr. 1272-
72, 1286; Div. Exs. 314, 320-22.) Based upon Hickman's
recommendation, on May 19, 1993, Bright purchased 660 shares of
JIND at $3 per share. Thereafter, Bright sent a check payable to
Rimson & Co. in the amount of $1,987.50. (Tr. 1274-75; Div. Ex.
150 at 7.)
Bright never received a Schedule 15G penny stock disclosure
form. (Tr. 1274; Div. Ex. 82.) Bright never received a penny
stock Customer Suitability Statement or an Agreement to Purchase
form in connection with his purchase of JIND stock. (Tr. 1278-
79; Div. Ex. 150 at 5a-6b.) The Customer Suitability Statement
and Agreement to Purchase form for Bright which Rimson & Co.
maintained in its files is dated May 14, 1993, five days before
Bright was first contacted by Hickman about JIND. Bright's
signature is forged on the Customer Suitability Statement and the
Agreement to Purchase form. (Tr. 1278-80; Div. Ex. 150 at 5a-
6b.)
Bright received a confirmation reflecting his purchase of
JIND shares which falsely stated that Bright's purchase order was
unsolicited. (Tr. 1281-82; Div. Ex. 150 at 7.) Bright received
a New Account Form in connection with his purchase of JIND.
However, Bright never completed the form or returned the form to
Rimson & Co. (Tr. 1275-76; Div. Ex. 150 at 1-4.) The new
account form for Bright which Rimson & Co. maintained in its
files contains a forged signature for Bright as well as an
inaccurate social security number. (Tr. 1276-77 line 20, 818-24;
Div. Ex. 150 at 1-4.) Bright still owns the JIND stock he
purchased from Rimson & Co. Bright attempted, but was unable, to
find a market to sell his JIND stock, although a recent account
statement reflected that the price of JIND stock was $0.90 a
share, equating to a loss of $1,386. (Tr. 1286-87.)
3. The Shindman Group
Rimson & Co. and Moshe Rimson allowed Shindman and his group
to use Rimson & Co.'s offices, equipment, and trading
capabilities in furtherance of their fraudulent sales and
promotion of various speculative securities. (Tr. 281, 731.)
Following are findings based on the testimony of Rimson & Co.
customers who were solicited by Shindman and purchased
speculative securities.
Shindman identified himself as a managing director of Rimson
& Co. to Charles Burch who resides in Pennsylvania. (Tr. 1538.)
Shindman sold 1,000 shares of INFE to Burch at $5 per share on
November 22, 1993. (Tr. 1547-48, 1553; Div. Ex. 301.) Shindman
also sold Burch 2,600 shares of LARI at $2.75 per share on March
3, 1994. (Tr. 1541-43, 1545-46; Div. Ex. 298.) Shindman stated
that: INFE was a "wildly successful" company; INFE would open
==========================================START OF PAGE 31======
for public trading; and INFE would open at "$9 at the first
tick." (Tr. 1546-47.) Shindman omitted to state that: INFE was
a speculative stock in which an investor could lose all his
money; INFE was not authorized for sale in Pennsylvania; and INFE
could be sold in only a limited number of states. (Tr. 1548-49.)
Shindman also told Burch in connection with Burch's purchase
of LARI shares that: LARI was going to be listed on the AMEX;
such listing would increase the value of the stock; and LARI
would reach a price of $6 - $8 per share in the spring of 1994.
(Tr. 1541-43.) Shindman omitted to state: the spread between the
bid and the ask prices for LARI stock; and that LARI was a
speculative stock in which an investor could lose all their
money. (Tr. 1542-45.) Burch received only page four of the INFE
subscription agreement, and never received an INFE prospectus or
an INFE stock certificate. (Tr. 1547, 1556-57.) Shindman
incorrectly completed Burch's new account forms by recording
false figures for Burch's net worth and annual income, among
other things. (Tr. 1560-61, Div. Exs. 299 and 300.) Burch spoke
to Rimson on several occasions and expressed to Rimson his
concern that Shindman was engaged in wrongdoing. (Tr. 1554.)
Burch lost approximately $13,350 through his investments with
Shindman and Rimson & Co. (Tr. 1555.)
Shindman sold Sanford Lerner 1,665 shares of TWIP at $10 per
share on or about July 24, 1995. (Tr. 1569, 1571-72; Div. Ex.
303.) Shindman told Lerner that: TWIP sales volume would reach
$10,000,000; TWIP was and would continue to be a profitable
company; TWIP would soon be a listed stock; insider profits would
increase 1,538%; and the price of TWIP would jump from $10 per
share to $15 per share upon listing. (Tr. 1568-70.) Shindman
omitted to state: that TWIP was a speculative stock in which an
investor could lose all his money; and the spread between the bid
and the ask prices of TWIP shares. (Tr. 1570-71, 736; Div. Exs.
134-36, 318, 360.) Lerner never received a TWIP prospectus.
(Tr. 1573.) Lerner lost approximately $17,000 on his investment
through Shindman and Rimson & Co. (Tr. 1572-73.)
Shindman sold Jerry Gold 2,000 shares of BTLI, 1,000 shares
at $4 per share on July 15, 1995, and 1,000 shares at $4.50 per
share on July 20, 1995. (Tr. 1580-82, 1586-89; Div. Ex. 304.)
Shindman stated that: BTLI would soon be listed on the Nasdaq;
BTLI was coming out with a secondary offering of BTLI shares at
$5 per share in 30 to 60 days; a 25% profit was guaranteed; BTLI
was trading at $3.50 bid and $4.00 asked; and Gold could not lose
any money. (Tr. 1579, 1581.) In connection with Gold's second
purchase of BTLI shares, Shindman told Gold that: BTLI was
trading at $4.00 bid and $4.50 asked; Pfizer was offering to buy
BTLI; and BTLI would be worth $8 - $10 per share. (Tr. 1581-83.)
Shindman omitted to state that BTLI was a speculative stock in
which an investor could lose all his money. (Tr. 1583-85, 736;
Div. Exs. 97, 315, 362.) Shindman never asked Gold about Gold's
==========================================START OF PAGE 32======
investment objectives, investing experience, or financial status.
(Tr. 1583.) Gold never received a BTLI prospectus. (Tr. 1580.)
Gold lost approximately $7,800 on his investment through Shindman
and Rimson & Co. (Tr. 1585-86.)
Shindman told Richard Huykman that he was a senior vice
president with, and principal of, Rimson & Co. (Tr. 1595.)
Shindman also told Huykman that he supervised people at Rimson &
Co. (Tr. 1595-96.) Shindman sold 500 shares of INFE to Huykman
at $5 per share on or about December 7, 1993. (Tr. 1599, 1604-
05; Div. Ex. 307.) Shindman stated that: INFE would start to
trade publicly in one week; INFE would be listed on the Nasdaq;
INFE would open for trading at between $6 - $8 per share;
institutional investors would buy the stock and add to the price
appreciation; and INFE already had earnings. (Tr. 1596-97,
1599.) Shindman omitted to state that: INFE was a speculative
stock in which an investor could lose all his money; and INFE
could be traded in only a limited number of states. (Tr. 1600-
01, 735; Div. Ex. 367.) Huykman told Shindman that he wanted
stocks with safety and growth and only little speculation and
risk. (Tr. 1600.) Huykman never received an INFE prospectus.
(Tr. 1597, 1607.) Huykman received only page four of the INFE
subscription agreement. (Tr. 1597-99; Div. Ex. 305.) Huykman
lost approximately $1,500 through his investments with Shindman
and Rimson & Co. (Tr. 1605-07; Div. Ex. 308.)
Shindman sold Joseph Calabrese 1,000 shares of TWIP at $9.75
per share on or about June 13, 1995, and 1,000 shares of BTLI at
$4 per share on or about July 11, 1995. (Tr. 1647, 1651-54,
1657; Div. Ex. 342.) Shindman told Calabrese that: TWIP was
going to be listed on the Nasdaq; the price of TWIP stock would
jump to $12 - $15 per share in 30 to 60 days and $20 - $22 per
share in six months; and Shindman would call Calabrese if the
stock dropped to $8 per share and would sell Calabrese's TWIP
shares if Shindman was unable to reach him. (Tr. 1646-47.) In
connection with Calabrese's purchase of BTLI shares, Shindman
told Calabrese that: BTLI was a no-risk opportunity; BTLI would
close on a secondary offering in two to three weeks; the
secondary offering was oversubscribed at $5 per share; and BTLI
would be listed on the Nasdaq. (Tr. 1650-51.) Shindman omitted
to state that: TWIP and BTLI were speculative stocks in which an
investor could lose all his money; and the spread between the bid
and the ask prices of TWIP and BTLI. (Tr. 1648-49, 1653, 736;
Div. Exs. 97, 134-36, 315, 318, 360, 362.)
Calabrese told Shindman that he did not want to purchase
high-risk stocks. (Tr. 1648.) Shindman never asked Calabrese
about Calabrese's investment objectives, investing experience, or
financial status. (Tr. 1648, 1652-53.) Calabrese never received
a prospectus on TWIP or BTLI. (Tr. 1659-60.) Calabrese sent a
letter of complaint to Rimson & Co., to which Rimson & Co. never
responded. (Tr. 1655-57; Div. Ex. 343.) Calabrese lost
==========================================START OF PAGE 33======
approximately $13,500 on his investments through Shindman and
Rimson & Co. (Tr. 1656-57.)
Shindman sold Donald Boland 1,500 shares of LBTI at $4 per
share on or about February 8, 1995, and 1,000 shares of BTLI at
$4 1/8 on or about March 22, 1995. (Tr. 1664-65, 1669-73; Div.
Exs. 344, 345.) Shindman stated that: LBTI was going to be a
listed stock in three or four weeks; and LBTI would very shortly
jump in price to $7 per share. (Tr. 1664-66.) In connection
with Boland's purchase of BTLI shares, Shindman stated that:
BTLI stock was selling for only ten times its book value, and
that the price of BTLI stock over its book value was 1/1. (Tr.
1669-70.) Shindman omitted to state that: LBTI and BTLI were
speculative stocks in which an investor could lose all his money;
and the spread between the bid and the ask prices of LBTI and
BTLI. (Tr. 1667-68, 1671, 736; Div. Exs. 121, 125, 359, 97,
315, 362.)
After Boland purchased the LBTI shares, Shindman told Boland
to ignore the February 28, 1995, account statement sent to Boland
indicating that LBTI was worth $2 per share, and told Boland that
he could sell Boland's LBTI stock for $4.25 per share at any
time. Based on Shindman's representations, Boland decided to
keep his LBTI shares. (Tr. 1666-70.) Boland lost approximately
$8,000 on his investments through Shindman and Rimson & Co. (Tr.
1673-74.)
Shindman sold Michael Coniglio 1,000 shares of CECE at $5.75
per share on or about September 15, 1993, and another 1,000
shares of CECE at $5.75 per share on or about September 18, 1993.
(Tr. 1684, 1686-87.) Shindman told Coniglio that: CECE would
double and triple in price within sixty to ninety days; and
Shindman could control the price of the stock. (Tr. 1682-85.)
Shindman omitted to inform Coniglio of the spread between the bid
and ask prices of CECE. (Tr. 1686.)
Shindman also solicited Coniglio to purchase shares of INFE.
Shindman falsely told Coniglio that: INFE was going to be listed
on the Nasdaq; Shindman could control the price of INFE stock;
and the price of INFE stock would increase to $15 - $20 per
share. (Tr. 1689-90.) When Coniglio asked Shindman to send him
an INFE prospectus or a similar document, Shindman refused and
told Coniglio that such a document would only disclose negative
information. (Tr. 1690.) Although Coniglio refused to purchase
the INFE stock, Shindman purchased 1,000 shares of INFE at $5 per
share on Coniglio's behalf without Coniglio's authorization.
(Tr. 1691-92, 1699-1700, 1705; Div. Exs. 347, 349.) After the
unauthorized purchase of INFE by Shindman, Shindman sent Coniglio
only the fourth (signature) page of the INFE subscription
agreement. (Tr. 1693-95; Div. Exs. 348, 349.)
Shindman also solicited Coniglio to purchase LARI stock. In
==========================================START OF PAGE 34======
the course of soliciting Coniglio to purchase shares of LARI,
Shindman falsely told Coniglio that LARI would obtain a listing
on a national exchange. (Tr. 1702-03.) Although Coniglio
refused to purchase the LARI stock, Shindman purchased 1,370
shares of LARI on Coniglio's behalf without Coniglio's
authorization. (Tr. 1703-04; Div. Ex. 350.) Coniglio lost
approximately $11,500 through his investments with Shindman and
Rimson & Co. (Tr. 1704-05.)
Shindman told Jack Rosemarin that he did not deal in
speculative stocks. (Tr. 1712-13.) Thereafter, Shindman sold
Rosemarin 5,000 shares of LARI at $2.75 per share on March 14,
1994. (Tr. 1713-14; Div. Ex. 351.) Shindman stated that: LARI
stock was going to be listed on the Nasdaq within six to eight
weeks; mutual funds would buy LARI shares when it became listed
and thereby push the price of LARI to $6 per share; and Shindman
would not make any money on the purchase by Rosemarin. (Tr.
1713-14.) In the course of a second solicitation of Rosemarin to
purchase LARI stock, Shindman again falsely told Rosemarin that
LARI stock would be listed on the Nasdaq and the price of LARI
stock had already increased and would increase further. Although
Rosemarin refused to purchase the additional LARI stock, Shindman
purchased 5,000 shares of LARI at $3 per share on Rosemarin's
behalf without Rosemarin's authorization. Rosemarin had to sell
shares of IBM at $52 per share in order to cover the charges for
this unauthorized purchase. (Tr. 1715-17; Div. Ex. 352.)
Shindman told Rosemarin that the Commission was
investigating Rimson & Co. A few days later, in the course of
Shindman's third solicitation of Rosemarin to purchase LARI
stock, Shindman falsely told Rosemarin that: the Commission had
dropped its investigation; LARI was performing well; and, again,
LARI was going to be listed on the Nasdaq, after which mutual
funds would be able to buy it. (Tr. 1718.) As a result of
Shindman's third solicitation of Rosemarin to purchase LARI
stock, Rosemarin agreed to purchase 1,000 shares of LARI at $5
per share on June 14, 1994, although the confirmation indicates
that he purchased 1,250 shares of LARI at $4 per share. (Tr.
1718-20, 1722-23; Div. Exs. 353, 354.)
Shindman never asked Rosemarin about Rosemarin's investment
objectives, investing experience, or financial status. (Tr.
1722-23.) Shindman also omitted to inform Rosemarin of the
spread between the bid and ask prices for LARI and that LARI was
a speculative stock in which an investor could lose all his
money. (Tr. 1723-24.) Rosemarin lost approximately $34,000
through his investments with Shindman and Rimson & Co. (Tr.
1724-25.)
The following tables summarize the financial data described
above. Specifically, Table 1 shows the commissions earned by
Respondent Shindman as a result of sales to the eight testifying
==========================================START OF PAGE 35======
customers. (Tr. 2695; Resp. Shindman s Reply Brief at 21.)
Table 2 summarizes the total losses suffered by these same eight
customers.
Table 1
Shindman Commissions on Sales
to Eight Testifying Customers
Commissions
Customer Stock No. of Share Total (at 2.5%)
Shares Price Price
Burch LARI 2,600 2.75 7,150 178.75
Burch INFE 1,000 5.00 250 125.00
Lerner TWIP 1,665 10.00 250 416.25
Gold BTLI 1,000 4.00 4,000 100.00
Gold BTLI 1,000 4.50 4,500 112.50
Huykman INFE 500 5.00 2,500 62.50
Calabrese TWIP 1,000 9.75 9,750 243.75
Calabrese BTLI 1,000 4.00 4,000 100.00
Boland LBTI 1,500 4.00 6,000 150.00
Boland LBTI 1,000 4.13 4,125 103.13
Coniglio CECE 1,000 5.75 5,750 143.75
Coniglio CECE 1,000 5.75 5,750 143.75
Coniglio INFE 1,000 5.00 5,000 125.00
Rosemarin LARI 5,000 2.75 13,750 343.75
Rosemarin LARI 5,000 3.00 15,000 375.00
Rosemarin LARI 1,250 4.00 5,000 125.00
TOTAL
$2,848.13
==========================================START OF PAGE 36======
Table 2
Shindman Customer Losses
Total Date
Customer Losses
Customer Losses Incurred Div. Exhibit Tr. pages
Burch $ 2,000 3/94 Ex. 380 1541-46,1548-49
Lerner 17,000 7/95 Ex. 390 1569-73
Gold 7,800 7/95 Ex. 383 1580-82, 1585-89
Huykman 1,500 12/93 Ex. 384 1599, 1604-07
Calabrese 13,500 7/95 Ex. 382 1653-54, 1656-57
Boland 8,000 3/95 Ex. 389 1669-74
Coniglio 11,500 9/93 Ex. 381 1686-87, 1704-05
Rosemarin 34,000 6/94 Ex. 385 1718-19, 1724-25
TOTAL $95,300
==========================================START OF PAGE 37======
4. The Cartwright & Walker Group
From approximately May to November 1994, Feyjin, and Dantoni
and other unregistered salespersons worked in a New York branch
office of Cartwright & Walker, while representing themselves to
customers as Rimson & Co. RRs. (Tr. 1403-04, 1429-30.) Ten or
more Cartwright & Walker salespersons worked twelve hour days and
each made over 200 cold-calls per day. (Tr. 1401, 1448.) They
were trained in high pressure sales tactics, and were supervised
and directed by Feyjin and Dantoni. (Tr. 1399-1401.) Feyjin and
Dantoni, among other Cartwright & Walker salesmen, cold-called
customers, falsely identified themselves to customers as "Gene
Shkilko of Rimson & Co.," and solicited transactions in MWTX and
HWTH shares. (Tr. 1401, 1403-04, 1429-30.) They used written
sales scripts that included price predictions that the price of
HWTH would be at $15 - $20 in the next ninety to one hundred
days, or that the price of MWTX would be at $7 or $8 in sixty to
ninety days and at $12 to $15 in the next six to eight months, at
times when customers were purchasing both MWTX and HWTH for
approximately $5 to $6 per share. (Tr. 1352-86, 1423; Div. Exs.
224-25, 235-40, 257, 259-70, 274-75.) Some scripts falsely
stated that MWTX had developed a patented microchip that Intel
Corp. had spent $50 million trying, but failed, to develop.
(Div. Exs. 262, 268.) The scripts also grossly misrepresented
the revenues and profits of these companies. Feyjin and Dantoni
knew almost nothing about the issuers of these securities.
Rimson & Co. and Moshe Rimson willfully participated in, and
knowingly contributed substantial aid and assistance to Feyjin's
and Dantoni's boiler-room operation. All customer orders
generated by Feyjin and Dantoni were faxed to Shkilko at Rimson &
Co. The trades were then executed by Moshe Rimson, and the
customers became Rimson & Co. accounts. (Tr. 288-90, 1430-31,
1450-51, 1476, 1486-91; Div. Ex. 283.) Shkilko authorized Feyjin
and Dantoni to use his name while soliciting sales of securities.
(Tr. 1478-79.) Feyjin and Dantoni paid the salary of an
assistant who worked with Shkilko at Rimson & Co. and who
serviced the accounts generated by the Cartwright & Walker
salesmen for Rimson & Co. (Tr. 288, 1407-08, 1431.) The
assistant worked in an office about twenty feet from Moshe
Rimson's office. Rimson had frequent conversations with her
concerning accounts and trades, although he knew that Rimson &
Co. never paid her any compensation. (Tr. 1406-08, 1431, 1451-
52.) Moshe Rimson was aware that Cartwright & Walker salesman
were generating sales for Rimson & Co. (Tr. 288, 1481-82.)
Feyjin and Dantoni received no compensation from Cartwright
& Walker or from Rimson & Co. (Tr. 1424-25.) Instead, they were
paid by a promoter of MWTX and HWTH, and there is no evidence
suggesting that Feyjin and Dantoni disclosed this to their
customers. (Tr. 1424-25.) Approximately 70 customer accounts
were opened under Shkilko's name through the above procedure,
==========================================START OF PAGE 38======
involving approximately 21,500 shares of MWTX and 2,500 shares of
HWTH. (Tr. 1474-75, 1480.) Rimson & Co., which made a market in
MWTX, profited from these transactions by receiving markups of
$0.50 on each share sold. (Tr. 1431-32, 1454.) Moshe Rimson and
Rimson & Co. had revenues of at least $60,000 from sales of MWTX
and $25,000 from sales of HWTH through Feyjin's and Dantoni's
boiler-room operation. (Tr. 278, 723.)
E. Books and Records of Rimson & Co.
As a result of the actions of the unregistered salesmen who
worked at Rimson & Co. and who effected securities solicitations
and transactions with the firm's customers, the books and records
of Rimson & Co. contained order tickets, new account forms, and
other account-related documents which reflected a false RR number
or the name of an RR who was not involved in the transaction when
the salesman who actually solicited the transaction was not
licensed, registered, or approved in accordance with NASD rules.
(Tr. 280, 454-56, 541-54, 1298-306, 1401, 1403-04, 1429-30; Div.
Exs. 63, 68-80.)
Scudiero, Iodice, Aguirre, and the other unregistered
salesmen in the Scudiero group, the Mende & Assoc. group, the
Shindman group, and the Cartwright & Walker group solicited
transactions with customers while they were not registered or
approved by the NASD, and Rimson & Co., with Moshe Rimson's
knowledge and assistance, created and maintained new account
forms, order tickets, and other account documents which falsely
reflected the names and numbers of RRs who were not involved in
the transactions for these customers. (Tr. 280, 454-56, 541-54,
1298-306, 1401, 1403-04, 1429-30; Div. Exs. 63, 68-80, 212-21.)
For a period of years before Larkin & Co. began clearing its
trades, Rimson & Co. maintained a system by which account
documents for customers who resided in states in which Rimson &
Co. was not registered to do business would reflect false
addresses located in states where Rimson & Co. was registered.
(Tr. 281, 477-80; Div. Ex. 370.) These were "Type 1" accounts,
designated by the numeral 1 or zero in the account number before
the last three digits (which represented the RR number) as, for
example, 201-12345-1-104. (Tr. 477-80, 605-10.)
The system was used whenever securities were sold to a
customer residing in a state where Rimson & Co. was not
registered as a broker-dealer, in states which had revoked or
suspended Rimson & Co.'s broker-dealer registration, or in states
where the securities being sold were not approved for sale. (Tr.
282, 477-80.) In particular, the system enabled the firm to
continue to do business with customers after the state in which
the customers resided had revoked Rimson & Co.'s registration and
to evade detection of this by recording false customer addresses
on the firm's official books and records. (Tr. 1020-21, 1023-24;
==========================================START OF PAGE 39======
Div. Ex. 70 at 7 & 293.) False customer addresses were recorded
on new account forms, transaction confirmations, and customer
account statements, while the real addresses of the Type 1
account customers were kept in card files in the back office to
facilitate mailing account documents and correspondence, when the
firm or the RR chose to do so, to the address in the prohibited
state where the Type 1 customer actually lived. (Tr. 477-80,
605-10.)
During the course of the Commission staff's examinations of
Rimson & Co.'s books and records in 1993 and 1994, the firm
failed to produce copies of broker-dealer books and records on a
timely basis, and it delayed for a period of months allowing the
staff to examine original books and records. (Tr. 102-05, 111-
12, 214-28; Div. Exs. 10-14.) To date, Rimson & Co. has not
produced such basic broker-dealer books and records as written
customer complaints, as requested by subpoena (and as required by
Section 17(a) of the Exchange Act and Rule 17a-4(b)(4)
thereunder). (Tr. 1753-67; Div. Exs. 372-76.) Indeed, personnel
of Rimson & Co. in one instance physically assaulted a Commission
examiner who was lawfully on the premises to conduct the
examination of the firm's books and records. (Tr. 111-14, 228-
30; Div. Ex. 15.) Finally, neither Rimson & Co. nor Moshe Rimson
complied with the subpoena duces tecum issued by this judge.
VI. CONCLUSIONS OF LAW
A. Books and Records
Rimson & Co., Moshe Rimson, and Shindman violated the books
and records provisions of the federal securities laws. Moshe
Rimson and Shindman aided and abetted and caused Rimson & Co. s
violations of Section 17(a) of the Exchange Act and Rule 17a-3
thereunder. Its failure to create and keep the records and books
required by the statute is detailed in the findings of fact. The
specific acts that comprise the violations include the
maintenance of the false Type 1 account system. In addition, the
findings of fact describe the inaccurate and forged information
contained in the new account forms, signatures, and order tickets
generated by the firm and by the salesmen whom Shindman
controlled in his boiler-room. Similarly, Moshe Rimson aided and
abetted and caused Rimson & Co. s violations of Section 17(a) of
the Exchange Act and Rule 17a-4 thereunder. Its failure to
produce required books and records and to maintain true books and
records is described in the findings of fact. Moshe Rimson aided
and abetted and caused Rimson & Co. to violate Section 17(b) of
the Exchange Act as a result of the delay in allowing the
Commission to examine the firm s books and records, which is
described in the findings of fact.
B. Unregistered Salespersons
==========================================START OF PAGE 40======
Rimson & Co. willfully violated, and Moshe Rimson aided and
abetted and caused the violations of Section 15(b) of the
Exchange Act and Rule 15b7-1 thereunder by the firm s association
with unregistered salespersons. As described in the findings of
fact, for example, Aguirre, Iodice, Scudiero, and others held
themselves out as Rimson & Co. brokers, and effected transactions
in securities while they were not registered or approved in
accordance with NASD rules.
C. Penny Stock Rules
Rimson & Co. willfully violated Section 15(g) of the
Exchange Act and Rules 15g-2 through 15g-6 and 15g-9 thereunder,
and Moshe Rimson caused and willfully aided and abetted the
firm s violations of the penny stock rules by failing to adhere
to the requirements for penny stocks as they applied to Mende &
Assoc. s sales of WECI and JIND common stock that were sold as
described in the findings of fact. WECI and JIND were penny
stocks within the meaning of Section 3(a)(51)(A) of the Exchange
Act in that they were not listed on a national securities
exchange or Nasdaq; were priced at less than $5 a share; and,
based on their most recent audited financial statements as of the
date of the relevant transactions in this matter, were offered by
issuers with net tangible assets of $2,000,000 or less, and
average annual revenue of less than $6,000,000 for the preceding
three years. (Tr. 274-75; Div. Exs. 138 at 3-4, 143 at F-2 and
F-3, 314-65.)
Specifically, as to Mende & Assoc. s customers, Rimson & Co.
failed to: (1) furnish to their customers a Schedule 15G Risk
Disclosure Document prior to effecting their transactions in WECI
and JIND shares, as required by Rule 15g-2; (2) comply with the
requirements to disclose to customers within the required time
period such information as bid and offer quotations, the
aggregate amount of the firm s compensation, and the aggregate
amount of any associated person s compensation, as required by
Rules 15g-3 through 15g-5; and (3) comply with the requirement to
provide customers with monthly statements containing market value
and other information, as required by Rule 15g-6. Rimson & Co.
failed to approve customer accounts for transactions in penny
stocks in accordance with the procedures set forth in Rule 15g-
9(b). Further, in connection with the Commission staff s
examination of Rimson & Co., the firm produced to the staff penny
stock customer suitability statements upon which customer
signatures were forged. Also, the suitability determination by
the principal, Moshe Rimson, was filled out, signed, and
backdated to indicate falsely that customers had been properly
approved for transactions in penny stocks as required by the
penny stock rules of the Exchange Act, when, in fact, the
transactions with these customers were effected unlawfully
without proper prior approval.
==========================================START OF PAGE 41======
D. Unregistered Broker-Dealer
From March 1993 through October 1993, Rimson & Co. and Moshe
Rimson willfully aided and abetted and caused Mende & Associates
operation as an unregistered broker-dealer in violation of
Section 15(a) of the Exchange Act. The Division alleged, in the
alternative, that Rimson and Rimson & Co. failed reasonably to
supervise within the meaning of Section 15(b)(4)(E) of the
Exchange Act. Because I find that Rimson and Rimson & Co.
willfully aided and abetted and caused Mende & Assoc. s
violations, I have not considered the failure to supervise
allegation.
The following acts fall within this violation and are
described in the findings of fact. Rimson & Co. and Moshe Rimson
allowed Mende, Hickman and other Mende & Assoc. salesmen to
submit to the NASD Form U-4 s to become registered
representatives of Rimson & Co. while they were in fact working
at Mende & Assoc. Mende & Assoc. reimbursed Rimson & Co. for the
cost of processing the Form U-4 s for the Mende & Assoc.
salesmen. When opening accounts for customers purchasing JIND
securities, the Mende & Assoc. salesmen filled out Rimson & Co.
new account forms and trade tickets, and Mende & Assoc. delivered
these documents to Rimson & Co. several times per week. Rimson &
Co. executed trades of JIND securities for Mende & Assoc. s
customers. Rimson & Co. maintained files for these customer
accounts, Rimson & Co. made a market in JIND securities, Moshe
Rimson personally was the trader who made a market in JIND
securities, and many JIND trades for Mende & Assoc. s customers
were executed under RR number 01, Moshe Rimson s RR number at
Rimson & Co. Mende & Assoc. paid part of the salary for a sales
assistant who worked for Moshe Rimson and who serviced the
accounts generated by Mende & Assoc. Rimson & Co. acted as the
clearing agent for Mende & Assoc. A Mende & Assoc. pre-
confirmation form letter directed customers to make checks
payable to Rimson & Co., and it was sent with an envelope pre-
addressed to Rimson & Co., for customers to use in sending their
checks. Rimson & Co. and Moshe Rimson profited from Mende &
Assoc. s operation as an unregistered broker-dealer by receiving
a percentage of the markup on securities transactions executed
for Mende & Assoc. s customers.
E. Antifraud Violations
From March 1993 through December 1994, Rimson & Co.
willfully violated, and Moshe Rimson willfully aided and abetted
and caused violations by Rimson & Co. of, the antifraud
provisions contained in Section 17(a) of the Securities Act,
Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and
Section 15(c) of the Exchange Act and Rule 15c1-2 thereunder by
engaging in the fraudulent acts described in the findings of
fact. The Division alleged, in the alternative, that Rimson and
==========================================START OF PAGE 42======
Rimson & Co. failed reasonably to supervise within the meaning of
Section 15(b)(4)(E) of the Exchange Act. Because I find that
Rimson & Co. willfully violated, and Rimson willfully aided and
abetted and caused Rimson & Co. s violations of, the anitfraud
provisions, I have not considered the failure to supervise
allegation.
The fraudulent acts included the following: The making of
material misrepresentation and omissions to customers was a
common sales practice at the firm. Mende, Hickman, and other
Mende & Assoc. salesmen worked off the premises of Rimson & Co.
while transmitting customer orders to Rimson & Co., and to Moshe
Rimson personally, for execution. Scudiero was a convicted felon
and was under suspension, and eventually barred, by the NASD from
association with any member firm during the period he worked at
Rimson & Co. and supervised salesmen. The customer checks which
were misappropriated or converted by Girodet, Aguirre, or
Scudiero were signed by Moshe Rimson and were given to Girodet,
Aguirre, or Scudiero, rather than mailed to the customer at the
address of record, and no written authorization was obtained from
the customer. There were often many more salesmen working in
Rimson & Co. s boardroom soliciting securities transactions with
public customers than there were registered representatives of
the firm. Rimson & Co. received numerous oral and written
customer complaints during the period that the violations
occurred. Rimson & Co. s books and records were kept in a state
of disarray or chaos. Moshe Rimson s position and
responsibilities as president, compliance officer, director of
sales, and director of trading, as well as the small size and
physical layout of the offices at the firm, put Moshe Rimson in a
position to be aware of everything that occurred at his firm.
From about September 1993 through about July 1995, Shindman
willfully violated Section 17(a) of the Securities Act and
Section 10(b) of the Exchange Act and Rule 10b-5 thereunder by
making material misrepresentations and omissions in connection
with the offer and sale of INFE, LARI, TWIP, BTLI, LBTI, and
CECE. As detailed in the findings of fact, he violated the
statutes and rules by: making baseless price predictions;
falsely representing that these securities would commence trading
on the NASD s OTCBB within specified periods of time; falsely
stating that INFE and other securities would trade on Nasdaq;
making exaggerated and false statements concerning INFE s
business, assets, and earnings; disseminating false or misleading
written materials concerning the securities, and falsely
representing to customers that copies of the prospectus were
unavailable; and making other materially false or misleading
statements or omissions in connection with the offer, purchase,
or sale of these securities.
Section 17(a) of the Securities Act and Section 10(b)
of the Exchange Act and Rule 10b-5 thereunder
==========================================START OF PAGE 43======
Section 17(a) of the Securities Act and Section 10(b) of the
Exchange Act, and Rule 10b-5 thereunder, prohibit the employment
of a fraudulent scheme or the making of material
misrepresentations and omissions in connection with the offer,
purchase, or sale of any security. To prove a violation of these
provisions, the Division must show: (1) that a misrepresented or
omitted fact was made in an offer, attempt to induce a purchase
or sale, or an actual purchase or sale of security; (2) that the
misrepresented or omitted fact was "material"; and (3) that the
respondent acted with the requisite "scienter." Basic, Inc. v.
Levinson, 485 U.S. 224, 240 (1988); Aaron v. SEC, 446 U.S. 680,
701-02 (1980).
"[M]ateriality depends on the significance the reasonable
investor would place on the withheld or misrepresented
information." Basic, Inc., 485 U.S. at 240. Information is
deemed material upon a showing that there is a substantial
likelihood that the omitted facts would have assumed actual
significance in the investment deliberations of a reasonable
investor. A statement is misleading if the information disclosed
does not accurately describe the facts, or if insufficient data
is revealed. Basic, Inc., 485 U.S. at 232; see also United
States v. Koening, 388 F. Supp. 670, 700 (S.D.N.Y 1974). Each
statement made to the prospective buyers is material and each
omission that I have described in the findings is misleading.
The misrepresentations and omissions made by Shindman to his
customers were material, and he acted knowingly or recklessly in
making them. Shindman acted knowingly or recklessly in operating
the fraudulent boiler-room described in the findings of fact.
A showing of scienter is required to prove violations of
Section 17(a)(1) of the Securities Act and Section 10(b) of the
Exchange Act, and Rule 10b-5 thereunder. Aaron, 446 U.S. at 697,
701. Scienter has been described as "a mental state embracing
intent to deceive, manipulate, or defraud." Ernst & Ernst v.
Hochfelder, 425 U.S. 185, 193 n.12 (1976). Scienter is
established by a showing that the defendant acted intentionally
or with severe recklessness. Raymond L. Dirks, 47 S.E.C. 434,
447 n.47 (1981), rev'd on other grounds, Dirks v. SEC, 463 U.S.
646 (1983); see Broad v. Rockwell Int'l Corp., 642 F.2d 929 (5th
Cir.), cert. denied, 454 U.S. 965 (1981); see also Warren v.
Reserve Fund, Inc., 728 F.2d 741, 745 (5th Cir. 1984); Hackbart
v. Holmes, 675 F.2d 1114, 1118 (10th Cir. 1982); Sunstrand Corp.
v. Sun Chemical Corp., 553 F.2d 1033, 1039 (7th Cir.) cert.
denied, 434 U.S. 875 (1977). Recklessness has been defined as
highly unreasonable conduct involving not merely simple or
excusable negligence, but an extreme departure from the standards
of ordinary care. SEC. v. Carriba Air, Inc., 681 F.2d 1318, 1324
(11th Cir. 1982); SEC v. Tome,. 638 F. Supp. 596, 622 (S.D.N.Y.
1986). Proof of recklessness may be inferred from circumstantial
evidence. Rolf v. Blyth, Eastman Dillon & Co., 570 F.2d 38, 47
(2d Cir.) cert. denied, 439 U.S. 1039 (1978).
==========================================START OF PAGE 44======
In SEC v. American Commodity Exchange, 546 F.2d 1361, 1365
(10th Cir. 1976), the court indicated that actual sales by the
defendant were not necessary to establish a violation of the
antifraud provision of Section 17(a) of the Securities Act. To
the same effect see United States v. Dukow, 330 F. Supp. 360
(W.D. Pa. 1971) and Fund of Funds Ltd. v. Arthur Andersen, 545 F.
Supp. 1314 (S.D.N.Y. 1982). The Dukow court held that even
though defendant was not a party to sales made by brokerage
personnel, he was part of the scheme and was not exonerated from
charges of securities fraud. "[T]he securities laws include as a
seller entities which proximately cause the sale . . . or whose
conduct is a 'substantial factor in causing a purchaser to buy a
security.'" Fund of Funds Ltd., 545 F. Supp. at 1353 (citing
Lawler v. Gilliam, 569 F.2d 1283, 1287 (4th Cir. 1978)).
The evidence is overwhelming that Shindman possessed a great
deal of explicit, negative financial information pertaining to
each of the issuers of the speculative stocks that he sold to his
customers. Yet, Shindman kept his customers entirely in the dark
as to the speculative and precarious nature of those issuers and
their stocks. Nine customer witnesses testified against
Shindman. I credit their consistent descriptions of
misrepresentations. Furthermore, Shindman admits that he knew,
at the time that he sold INFE to his customers, that there can
never be any assurance that a stock without a public market will
find a public market, or that, if a public market develops, it
will continue. (Tr. 3093-95.) Shindman admits that he engaged
in many of the alleged activities. For example, he admits that
Calabrese was his customer and that he sold him TWIP and BTLI.
(Tr. 2713-14.) Shindman does not deny that Boland was his
customer and that he sold BTLI and LBTI to Boland. (Tr. 2712-
13.) Shindman, who signed Coniglio's new account form, admits
that Coniglio was his customer, and that he was responsible for
transactions in Coniglio's account. (Tr. 2686-88; Shindman Ex.
4.) Similarly, Shindman does not dispute that he solicited Dr.
Rosemarin to purchase LARI stock. (Tr. 2715.) Shindman also
admits that he received copies of any confirmations bearing his
RR number and, while Rimson & Co. was self-clearing, copies of
all monthly account statements for every customer listed under
his RR number. (Tr. 2754-55.) Finally, Shindman admits that he
recorded Burch's Colorado address on a second new account form,
even though Burch never told Shindman that he wanted mail or
documents sent to him at that address. (Tr. 2675-76, 2683; Div.
Exs. 380, 300.)
Shindman also admits that he knew that no brokerage firm,
nor any officer or director of any company, controls the NASD,
and that therefore, no officer, director or brokerage firm can
assure that the NASD or other regulatory body will approve a
stock for public trading. (Tr. 3094-95.) Although never
officially a sales manager, officer, principal, or managing
director of Rimson & Co., Shindman admits that he falsely
==========================================START OF PAGE 45======
identified himself to his customers and prospective customers as
being a managing director at Rimson & Co. (Tr. 2629-31, 2636.)
He further admits that he had business cards prepared with that
title, which he sent out to customers and prospective customers.
(Div. Ex. 394.)
Shindman admits that he dictated to the callers what they
were to say when contacting prospective customers, and that he
gave them books and materials that instructed them on how to sell
stocks, among other things. (Tr. 2736-37.) For the most part,
these individuals had no experience in the securities business.
In fact, most of them did not complete their high school
education. (Tr. 3023-24.) Shindman admits that INFE, LARI,
BTLI, LBTI, CECE, and TWIP are speculative stocks, that he knew
them to be so at the time he solicited his customers or
prospective customers to purchase them, and that speculative
stocks are stocks in which investors could lose all [their]
money. (Tr. 2645-47.) By failing to inform his customers of
these facts, Shindman violated the antifraud provisions.
Shindman also admitted that, before soliciting purchases of
the foregoing securities from his customers and prospective
customers, he was aware of negative financial information
concerning the issuers of INFE, LARI, LBTI, CECE, BTLI and TWIP.
Specifically, Shindman admitted that he knew the following six
series of facts.
First, INFE reported assets of less than $50,000; that
no audited financial statements existed for INFE; and that,
since its inception, INFE reported that it had never had any
income and had had only losses (Tr. 3067; Div. Ex. 368 at
16.)
Second, on December 31, 1991, Airline Software Co., a
predecessor company to LARI, reported that it had assets of
only $500, a deficit of $9,000, and no income; at December
31, 1992, Mining Corp., another predecessor company to LARI,
reported that it had assets of less than $100,000, a deficit
of $9,150, and no income; and audited financial statements
for LARI reported that it had no income and a net loss of
$5,000 for the period November 1991 to October 1993. (Tr.
3070-73; Div. Ex. 316.)
Third, on December 31, 1993, LBTI reported assets of
less than $400,000, and, one year later at December 31,
1994, LBTI s assets had dropped to $335,000; LBTI reported a
net loss of $422,000 and zero sales for the year ended
December 31, 1993; for the eight month period ending August
31, 1994, LBTI reported a net loss of $648,000, zero sales,
an operating cash flow of negative (-) $596,000, and a cash
balance of only $2,600; LBTI reported that there is doubt as
to its ability to obtain the financing necessary to achieve
==========================================START OF PAGE 46======
profitable operations; and audited financial statements for
LBTI indicated that there is substantial doubt as to LBTI s
ability to continue as a going concern. (Tr. 3074-81; Div.
Ex. 125.)
Fourth, for both the three month and six month period
ending June 30, 1993, (i.e. the quarter ending immediately
prior to when Shindman commenced soliciting purchases of
CECE), CECE reported net losses of $150,000. (Tr. 3084;
Div. Ex. 107.)
Fifth, financial statements of Research and Development
Co., Inc., the predecessor corporation of BTLI, for the
twelve months ended April 30, 1994, reported a net income of
only $273,000; and Research and Development Co., Inc. s
consolidated balance sheet for the twelve month period ended
April 30, 1993, reported that its financial predicament
raises substantial doubt about the company s ability to
continue as a going concern. (Tr. 3085-88; Div. Ex. 315.)
Sixth, TWIP reported that it had an absence of any
substantial operating history, that the peculiarities of the
entertainment industry make it impossible to predict the
success of any of TWIP s projects, and that TWIP s
management was inexperienced; at May 12, 1994, TWIP reported
that it had working capital of only $4,362 and that there
was no assurance that the public market for TWIP s
securities would continue; an independent auditor s report
dated October 18, 1994, indicated that TWIP had insufficient
sources of cash to sustain operations; and that TWIP s
financial statements raised substantial doubt about TWIP s
ability to continue as a going concern; TWIP s financial
statements dated August 31, 1994, reported that, from its
inception to August 31, 1994, TWIP had assets of only
$24,730, no income and a net loss of $128. (Tr. 3089-98;
Div. Ex. 318.)
Thus, the evidence is overwhelming that Shindman possessed
material negative financial information pertaining to each of the
issuers of the speculative stocks that he sold to his customers.
Yet, Shindman intentionally misled customers as to the
speculative and precarious nature of those issuers and their
stocks.
Despite possessing this mass of information, Shindman
testified that he had no material, negative information in his
possession concerning CECE (Tr. 2929); that he was not aware of
any negative information that might cause one to conclude that
there was a significant possibility that INFE or LARI might go
down in value (Tr. 2930); that he had never learned of any
negative information concerning LBTI, other than that it was a
research and development company traded on the OTCBB (Tr. 2983);
==========================================START OF PAGE 47======
that he had never learned of any negative information concerning
BTLI (Tr. 2972); and that he did not think there was any kind of
specific negative information about [TWIP] that [he] read about
it. (Tr. 2955.)
The prediction of a substantial increase in the price of any
security without a reasonable basis for making such a prediction
is fraudulent. SEC v. Hasho, 784 F. Supp. 1059, 1109 (S.D.N.Y.
1992); Lester Kuznetz, 48 S.E.C. 551, 553 (1986). The Commission
has repeatedly held that it is inherently fraudulent to predict
specific and substantial increases in the price of a speculative
security. Cortlandt Investing Corp., 44 S.E.C. 45, 50 (1969);
Crow, Brourman & Chatkin, Inc., 42 S.E.C. 938, 944 (1966);
Alexander Reid & Co., 40 S.E.C. 986, 991 (1962). The Commission
has stated, moreover, that such predictions of substantial price
increases within relatively short periods of time with respect to
a promotional and speculative security of an unseasoned company
are a hallmark of fraud and cannot be justified. Alfred
Miller, 43 S.E.C. 233, 235 (1966) (citing Hamilton Water & Co.,
42 S.E.C. 784, 787-88 (1965)).
In light of the foregoing financial information, there was
no reasonable basis for Shindman to make predictions of price
increases in these securities. See SEC v. R.A. Holman & Co., 366
F.2d 456, 458-59 (2nd Cir. 1966) (finding no reasonable basis for
price predications when company sustained a loss, even though it
had been profitable for three years); Hasho, 784 F. Supp. at 1109
(finding no reasonable basis for predictions about unseasoned
companies either operating at a loss or with small profits);
Lester Kuznetz, 48 S.E.C. at 553-54 n.3 (finding no reasonable
basis for predictions that an investment was guaranteed or
relatively safe where company has four years of operating
losses).
The evidence also established that the Shindman group
operated throughout 1994 and 1995 in Rimson & Co.'s boardroom.
Four former Rimson & Co. employees, including Wilson, James
Sweeney (a former RR at Rimson & Co.), and Seeta Coward and Hall
(both of whom are former Rimson & Co. back office employees)
testified that Shindman's salesmen called prospective customers,
falsely identified themselves as "Alex Shindman," and solicited
purchases of speculative securities using high pressure sales
tactics and scripted sales pitches containing baseless price
predictions and other material misrepresentations. These
activities are described in the findings of fact. Thus, I
conclude that Shindman conducted a boiler-room operation that
consisted of unqualified, improperly supervised salesmen; high
pressure long distance telephone sales designed to induce hasty
investment decisions by customers about whose financial condition
the salesmen knew very little; and heavy dealings in speculative
[securities] of issuers about whose adverse financial conditions
there was very little disclosure. SEC v. Charles A. Morris &
==========================================START OF PAGE 48======
Associates, Inc., 386 F. Supp. 1327, 1336 (W.D. Tenn. 1973). The
court in Charles A. Morris & Associates stated that the
maintenance of such conditions in and of itself constitutes a
violation [of the antifraud provisions of the Securities Act and
the Exchange Act.] The maintenance of these conditions stands in
harsh conflict with the Act s [sic] purpose to protect investors.
Implementing that purpose, therefore, requires that the use of
boiler room operations be abolished. Id. (citing Berko v.
SEC, 297 F.2d 116 (2d Cir. 1961)). Accordingly, Shindman also
willfully violated the antifraud provisions through the operation
of his boiler-room at Rimson & Co.
Liability attaches to salespersons employed by broker-
dealers who knowingly misstate or omit to state material facts,
or make recommendations about securities which have no reasonable
basis. Hanly v. SEC, 415 F.2d 589, 597 (2d Cir. 1969). False
statements that penny stocks could be imminently listed on an
exchange violate the antifraud provisions. SEC v. Wellshire
Securities, Inc., 737 F. Supp. 251, 256 (S.D.N.Y. 1990).
Misrepresenting or failing to disclose the speculative nature of
securities, or negative financial information about the issuer of
securities, violates the antifraud provisions. Hasho, 784 F.
Supp. at 1109; Hanly, 415 F.2d at 595-99; R.A. Holman & Co., 366
F.2d at 458. In addition, "[m]isrepresenting or omitting to
disclose a broker's financial or economic incentive in connection
with a stock recommendation constitutes a violation of the
antifraud provisions." Hasho, 784 F. Supp. at 1110; Chasin v.
Smith, Barney & Co., 438 F.2d 1167, 1172 (2d Cir. 1970).
Finally, misrepresenting one's own background and qualifications
as a stockbroker to induce customers to engage in securities
transactions violates the antifraud provisions. Marbury
Management, Inc. v. Kohn, 629 F.2d 705 (2d Cir. 1980).
At the December 1995 hearing, nineteen customers testified
concerning their securities transactions with Rimson & Co. Each
customer was cold-called by a Rimson & Co. or Mende & Assoc.
salesman and solicited to purchase a speculative security traded
on the NASD's OTCBB. The salesmen, who included Scudiero,
Girodet, Aguirre, Iodice, Hickman, Shindman, and others, all made
baseless predictions of substantial price increases in these
speculative securities. Most of the salesmen falsely stated that
the securities would become listed on the Nasdaq or on a national
securities exchange within a short period of time. None of the
customers testified that any negative financial information about
the issuers of these securities was disclosed to them, nor was
any customer told that any of these securities was a penny stock,
or was a speculative security. Rimson & Co. salesmen to whom
Scudiero paid kickback compensation for selling WECI securities
never disclosed the source or amount of such compensation to
their customers who testified. (Tr. 351-75, 286-87, 577-78, 640,
699-700, 710, 848, 980, 1019.)
==========================================START OF PAGE 49======
In addition to testimony of Rimson & Co.'s customers, the
Division also introduced testimony of several witnesses who
personally observed the fraudulent sales practices. Emerito
Cruz, an unregistered salesman who worked at Mende & Assoc.,
testified at length concerning the fraudulent boiler-room sales
practices at Mende & Assoc., as well as Moshe Rimson's integral
role in Mende & Assoc.'s operation from approximately May through
October 1993. (Tr. 1179-259.) Cruz testified that approximately
ten unregistered salesmen at Mende & Assoc. each made hundreds of
cold-calls per day to prospective customers. They falsely
identified themselves as "Todd Hickman" from Mende & Assoc., and
solicited transactions in JIND securities. These salesmen used
high pressure sales tactics and sales scripts which contained
baseless price predictions concerning JIND and falsely stated
that JIND would become listed on Nasdaq or the American Stock
Exchange. (Tr. 1199, 1201-03, 1223-25; Div. Exs. 314, 320, 321,
322.) The salesmen never disclosed to their customers that JIND
was a penny stock, or a speculative security. (Tr. 1208-09.)
Wilson testified concerning the sales practices of
Shindman's group of unregistered salesmen working in Rimson &
Co.'s boardroom during 1994 and 1995. (Tr. 725-34, 749.) He
testified that almost every time he had occasion to visit the
boardroom he heard and observed up to thirty unregistered
salesmen cold-calling prospective customers, falsely identifying
themselves as "Alex Shindman," and soliciting transactions in
various speculative securities, including LBTI, TWIP and BTLI.
(Tr. 728-34.) Wilson testified that these salesmen used sales
scripts (such as Div. Ex. 16), and that he would hear them
reciting the scripts verbatim. The scripts (see, e.g., Div. Ex.
16) contained baseless price predictions and other material
misrepresentations and omissions concerning speculative stocks.
These salesmen never disclosed to their customers any negative
financial information about the issuers, or that the securities
were speculative.
Other witnesses, including Sweeney and Coward, who are both
former employees of Rimson & Co., also testified concerning the
large number of individuals who worked for Shindman in a boiler-
room environment in Rimson & Co.'s boardroom and in the corridor
area surrounding Shindman's office. (Tr. 612-26, 1306-12.)
Shindman also misrepresented his experience and position at
Rimson & Co. by holding himself out as a managing director of the
firm, and he sent customers a business card bearing that title.
(Tr. 1538.)
Unauthorized trading violates the antifraud provisions.
Hasho, 784 F. Supp. at 1110; Wellshire Securities, Inc., 737 F.
Supp. at 259; Cruse v. Equitable Securities of New York, Inc.,
678 F. Supp. 1023, 1028-29 (S.D.N.Y. 1987); Bischoff v. G.K.
Scott & Co., Inc., 687 F. Supp. 746, 750-51 (E.D.N.Y. 1986);
Pross v. Baird Patrick & Co., 585 F. Supp. 1456, 1459 (S.D.N.Y.
==========================================START OF PAGE 50======
1984). Several customers testified as to unauthorized trading in
their Rimson & Co. accounts. Often when the customer confronted
their Rimson & Co. broker with the trade, the salesman attempted
to persuade the customer not to cancel it, or the salesman
promised to correct it and never did. (See Tr. 627-65, 682-715,
842-95, 1684-1705, 1712-25.) Taken together, this evidence
constitutes a pattern of unauthorized trading and a fraudulent
abuse of customer accounts for any number of possible unlawful
purposes, including manipulating the price of the securities by
falsely creating the appearance of buying activity in the market,
or parking securities that would otherwise create a net capital
violation for Rimson & Co. if left in the firm's inventory
trading account. (See Tr. 785-86.)
A broker implicitly represents that he will act in
accordance with industry standards when he undertakes to
represent a customer. N. Wilson, R. Phillips, and T. Russo,
Regulation of Brokers, Dealers and Securities Markets, 2.10 at
2-51 (1977). A broker who violates this representation by
misappropriating funds received for safekeeping to purchase
securities or as proceeds from the sale of securities violates
the antifraud provisions. Joseph Garofalo, Fed. Sec. L. Rep.
(CCH) [1971-1972 Transfer Binder] 78,495 at 81,080 (Dec. 22,
1971). Misappropriation or conversion of customer funds or
securities violates the antifraud provisions of the federal
securities laws. See Cameron F. Evans, 55 SEC Docket 710
(October 20, 1993); Prudential Bache Securities, Inc., 34 SEC
Docket 1456 (January 2, 1986); Reynolds & Co., 39 S.E.C. 902
(1960); Merrill Lynch, Pierce, Fenner & Beane, 31 S.E.C. 494
(1950); D.S. Waddy & Co., 30 S.E.C. 367 (1949).
Three Rimson & Co. customers testified that funds were
misappropriated from their Rimson & Co. accounts, and that their
signatures were forged on the backs of Rimson & Co. checks which
were made payable to them. (Tr. 842-95.) John Rock, a Girodet
customer, testified that two checks in amounts of $16,096 and
$2,820 were drawn on his Rimson & Co. account, endorsed with a
forgery of his signature, and misappropriated without his
knowledge or authorization. (Tr. 994-1008; see Div. Exs. 23,
24.) Victor Priolo, a Scudiero customer, testified that $16,792
was drawn from his Rimson & Co. account by means of a check
payable to his wife which bears an endorsement with a forgery of
her signature and the check was deposited or cashed in Scudiero's
personal account without Priolo's knowledge or authorization.
(Tr. 627-65; see Div. Ex. 22.) Dr. Ian Reynolds, an Aguirre
customer, testified that three checks in the amounts of $6,855,
$14,350, and $29,892 were drawn on his Rimson & Co. account,
endorsed with a forgery of his signature and misappropriated
without his knowledge or authorization. (Tr. 648-51; see Div.
Exs. 25, 26, 27.) These thefts of customer funds from retail
brokerage accounts, by a firm and its salesmen who implicitly
represent that they will act in accordance with industry
==========================================START OF PAGE 51======
standards when undertaking to represent a customer, constitute
further violations of the antifraud provisions by Rimson & Co.
and Moshe Rimson.
VII. THE PUBLIC INTEREST
I have concluded that the Division has established that the
three Respondents committed the illegal acts described in the
OIP. Hence, the remaining issue is the sanction that is
appropriate in the public interest. In this light, I have taken
into account the following factors:
the egregiousness of the defendant's actions, the
isolated or recurrent nature of the infraction, the
degree of scienter involved, the sincerity of the
defendant's assurances against future violations, the
defendant's recognition of the wrongful nature of his
conduct, and the likelihood that the defendant's
occupation will present opportunities for future
violations.
Steadman v. SEC, 603 F.2d 1126, 1140 (5th Cir. 1979), aff'd on
other grounds, 450 U.S. 91 (1981). The severity of a sanction
depends on the facts of each case and the value of the sanction
in preventing a recurrence. Berko v. SEC, 316 F.2d 137, 141 (2d
Cir. 1963); Richard C. Spangler, Inc., 46 S.E.C. 238, 254 n.67
(1976); Leo Glassman, 46 S.E.C. 209, 211-12 (1975).
Because Rimson refused to testify about facts and
circumstances peculiarly within his knowledge, he has created an
adverse inference that to have done so would have damaged his
position. Strathmore Securities, Inc., 43 S.E.C. 575, 590 (1967)
(citing 8 Wigmore, Evidence, 2272 (3rd ed. 1940)), petition for
review denied 407 F.2d 722 (D.C. Cir. 1969); see also Sterling-
Harris Ford, Inc., 315 F.2d 277, 279 (7th Cir. 1963), cert.
denied, 375 U.S. 814 (1963); N. Sims Organ & Co., v. SEC, 293
F.2d 78, 80-81 (2nd Cir. 1961), cert. denied, 368 U.S. 968
(1962); SEC v. Kelly Andrews & Bradley, Inc., 341 F. Supp. 1201,
1205 (S.D.N.Y. 1972).
All three Respondents actions were particularly egregious.
They involved fraudulent actions that gained thousands of dollars
from investors. The fraud occurred over a number of years,
involved at least eight investors as to Shindman and at least
nineteen investors as to Moshe Rimson and Rimson & Co., and did
not result from an isolated event but rather from a pattern of
coordinated acts.
Respondents Moshe Rimson s and Rimson & Co. s intent to
deceive and defraud investors is demonstrated by: the NASD
violations incurred by the company and by Moshe Rimson during the
course of his conduct; his twenty-five-year employment in the
==========================================START OF PAGE 52======
securities industry which negates a finding of mere ignorance;
the complexity of the schemes that were generated to deceive the
Commission and the investors; the financial interest that
Respondent Rimson and Rimson & Co. maintained in the ventures;
and the recurring failures to repay the victims. A high degree
of scienter is therefore established in the instant case.
Respondent Rimson demonstrates no assurances against future
violations and he recognizes no wrongful conduct for which he
takes responsibility. Finally, because his most productive adult
professional years have been spent in the securities industry, he
is likely to continue to work in the industry. It is therefore
in the public interest that Respondent Rimson & Co. s
registration be revoked and that Respondent Moshe Rimson be
barred from association with any broker or dealer and from
participation in any penny stock offering.
Sections 15(b)(4) and 15(b)(6) of the Exchange Act authorize
me to bar an individual from association with any broker or
dealer if I find that such individual willfully violated, or
willfully aided, abetted, counseled, commanded, induced or
procured a violation of, any provision of the federal securities
laws while associated with a broker or dealer and that it is in
the public interest to do so. Section 15(b)(6) also authorizes
me to bar an individual from participating in a penny stock
offering if such individual willfully violated the federal
securities laws while participating in the offering of any penny
stock. The Commission has held that a bar is appropriate when it
would serve to protect public investors and the brokerage
community from further harm. Wellshire Discount Securities,
Inc., 54 SEC Docket 927 (1993). In addition, Section 15(b)(4) of
the Exchange Act authorizes me to revoke the registration of any
broker or dealer if I find that such broker or dealer, or any
person associated with such broker or dealer, has willfully
violated any provision of the federal securities laws and that
revocation is in the public interest. Under both Sections
15(b)(4) and 15(b)(6) I can consider Rimson & Co.'s and Moshe
Rimson's extensive disciplinary histories in deciding what
sanctions would be in the public interest in this matter. See
Miami Securities, 45 S.E.C. 3, 5 n.5 (1972); Wellington Hunter
Associates, 45 S.E.C. 20, 22 (1972).
I have already found that the following facts as to
disciplinary histories were established at the hearing. I also
conclude that they provide further proof that both Rimson & Co.
and Moshe Rimson merit severe sanctions: Rimson & Co. and Moshe
Rimson have extensive disciplinary histories which include a
permanent injunction from violating the antifraud provisions,
which was entered in 1986; sanctions in a related Commission
administrative proceeding; numerous NASD complaints, proceedings,
and sanctions; the suspension or revocation of Rimson & Co. s
broker-dealer registration by several states; and numerous
customer arbitration claims. Many of these matters involved
==========================================START OF PAGE 53======
allegations or findings of fraudulent sales practices. In
addition, within the last two years the Commission and the NASD
have received over 187 written complaints from customers of
Rimson & Co., many of which allege abusive and fraudulent conduct
by the firm and its personnel.
Respondent Shindman s intent to deceive and defraud
investors is demonstrated by: his eight-year employment in the
securities industry which negates a finding of mere ignorance;
the complexity of the schemes, including the boiler-room that
Shindman operated, that were generated to deceive the investors;
the financial interest in the form of commissions that Shindman
maintained in the ventures; and the recurring failures to repay
the victims. A high degree of scienter is thus established in
the instant case. Shindman demonstrates assurances against
future violations but he acknowledges no wrongful conduct for
which he takes responsibility. Finally, his most productive
adult professional years have been spent in the securities
industry and he continues to work in the industry. Thus,
Respondent Shindman is likely to have fresh opportunities for
future violations of the securities laws if he is not severely
sanctioned. It is therefore in the public interest that
Respondent Shindman be barred from association with any broker or
dealer.
Cease and Desist
Section 8A of the Securities Act and Section 21C of the
Exchange Act authorize me to issue an order requiring all three
Respondents to cease and desist from committing or causing
violations and future violations of provisions of the Securities
Act or the Exchange Act. The evidence at hearing shows that
Shindman willfully violated Section 17(a) of the Securities Act
and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder,
and aided and abetted and caused Rimson & Co. s violations of
Section 17(a) of the Exchange Act and Rule 17a-3 thereunder.
Therefore, a cease and desist order is appropriate against him.
The evidence at hearing shows that Rimson & Co. (i)
willfully violated Section 17(a) of the Exchange Act and Rules
17a-3 and 17a-4 thereunder; (ii) willfully violated Section 17(b)
of the Exchange Act; (iii) willfully violated Section 15(b) and
Rule 15b7-1 thereunder; (iv) willfully violated Section 15(g) of
the Exchange Act and Rules 15g-2 through 15g-6 and 15g-9
thereunder; (v) willfully aided and abetted and caused violations
of Section 15(a) of the Exchange Act; and (vi) willfully
violated Section 17(a) of the Securities Act, Section 10(b) of
the Exchange Act and Rule 10b-5 thereunder, and Section 15(c) of
the Exchange Act and Rule 15c1-2 thereunder.
The evidence at hearing shows that Moshe Rimson (i)
willfully aided and abetted and caused Rimson & Co. s violations
==========================================START OF PAGE 54======
of Section 17(a) of the Exchange Act and Rules 17a-3 and 17a-4
thereunder; (ii) willfully aided and abetted and caused Rimson &
Co. s violations of Sections 17(b) of the Exchange Act; (iii)
willfully aided and abetted and caused Rimson & Co. s violations
of Section 15(b) and Rule 15b7-1 thereunder; (iv) willfully aided
and abetted and caused Rimson & Co. s violations of Section 15(g)
of the Exchange Act and Rules 15g-2 through 15g-6 and 15g-9
thereunder; (v) willfully aided and abetted and caused violations
of Section 15(a) of the Exchange Act; and (vi) willfully aided
and abetted and caused Rimson & Co. s violations of Section 17(a)
of the Securities Act, Section 10(b) of the Exchange Act and Rule
10b-5 thereunder, and Section 15(c) of the Exchange Act and Rule
15c1-2 thereunder. Therefore, cease and desist orders are also
appropriate against Moshe Rimson and Rimson & Co.
Disgorgement
Section 8A of the Securities Act and Section 21C of the
Exchange Act provide that "the Commission may enter an order
requiring accounting and disgorgement, including reasonable
interest." Disgorgement seeks solely to deprive the wrongdoer of
his or her ill-gotten gains. See Hibbard, Brown & Co., 58 SEC
Docket at 2787 (citing Hateley v. SEC, 8 F.3d 653 (9th Cir.
1993)), aff d, No. 95-3270 (3d Cir. 1996); Toney L. Reed, 51
S.E.C. 1009, 1013 (1994) (same); Kenneth L. Lucas, 51 S.E.C.
1041, 1046 (1994) (citing SEC v. First City Financial Corp., 890
F.2d 1215, 1230 (D.C. Cir. 1989); Hateley, 8 F.3d at 655).
Disgorgement and restitution are equitable remedies which
are similar but not identical. Restitution prevents a wrongdoer
from being unjustly enriched by his wrongdoing, or requires the
wrongdoer to restore his victim to the status quo ante. See Toney
L. Reed, 51 S.E.C. at 1013 (citing Restatement of Restitution,
1 (1937); D. Dobbs, Remedies, 4.1 at 224 (1973); SEC v. Blavin,
557 F. Supp. 1304, 1316 (E.D. Mich. 1983), aff d, 760 F.2d 706
(6th Cir. 1985)); see also Hibbard, Brown & Co., 58 SEC Docket
2769, 2787 (March 13, 1995). Disgorgement merely requires the
return of wrongfully obtained profits and does not, therefore,
impose any meaningful economic cost on the law violator. S. Rep.
No. 101-337, at 9-10 (1990). The primary purpose of disgorgement
is not to compensate investors. Rather, the purpose is to
deprive a wrongdoer of his unjust enrichment and to deter others
from violating the securities laws." First City, 890 F.2d at
1230, 1232 n.24; SEC v. Tome, 833 F.2d 1086, 1096 (2d Cir. 1987).
Section 8A of the Securities Act and Section 21C of the Exchange
Act expressly authorize the Commission:
to order disgorgement in its administrative proceedings
in order to ensure that respondents in administrative
proceedings do not retain ill-gotten gains. In
contrast to damage[s] granted in private actions, which
are designed to compensate the victims of a violation,
==========================================START OF PAGE 55======
disgorgement forces a defendant to give up the amount
by which he was unjustly enriched.
S. Rep. No. 101-337, at 16 (1990). Disgorgement may not be used
punitively. Kenneth L. Lucas, 51 S.E.C. at 1046 n.24 (citing
First City, 890 F.2d at 1231; SEC v. Blatt, 583 F.2d 1325, 1335
(5th Cir. 1978); SEC v. Manor Nursing Centers, Inc., 458 F.2d
1082, 1104 (2d Cir. 1972)).
Disgorgement can be exercised only over property causally
related to the wrongdoing. First City, 890 F.2d at 1231. When
calculating disgorgement, however, "separating legal from illegal
profits exactly may at times be a near-impossible task." Id.
(citing Elkind v. Liggett & Myers, Inc., 635 F.2d 156, 171 (2d
Cir. 1980)). Disgorgement, therefore, "need only be a reasonable
approximation of profits causally connected to the violation."
Id.
Once the government presumptively shows that its
disgorgement figure reasonably approximates the amount of unjust
enrichment, the burden shifts to the respondent to "clearly"
demonstrate that the disgorgement figure was not a reasonable
approximation. SEC v. Lorin, 76 F.3d 458, 462 (2d Cir. 1996);
SEC v. Patel, 61 F.3d 137, 140 (2d Cir. 1995); First City, 890
F.2d at 1232. Any risk of uncertainty as to the disgorgement
amount "should fall on the wrongdoer whose illegal conduct
created that uncertainty." First City, 890 F.2d at 1232
(citations omitted).
In Hateley v. SEC, 8 F.3d 653 (9th Cir. 1993), the
petitioners, a broker-dealer and two of its three officers,
challenged a decision by the Commission affirming a disgorgement
order imposed on them jointly and severally by the NASD. A third
officer of the broker-dealer firm had entered into a finder s
fee agreement with a person not registered with the NASD as a
representative of the firm, in violation of the association s
rules. Hateley, 8 F.3d at 654. The agreement provided that the
firm would pay that finder ninety percent of the commissions
generated by all securities transactions he solicited for the
firm. Id. Although the third officer had no authority to enter
such agreement, the petitioner officers decided to honor the
agreement. Id.
The Commission decision required the petitioners to disgorge
an amount equal to the commissions actually generated as a result
of the finder s activities. Id. at 655. The Court of Appeals
for the Ninth Circuit concluded the amount of the disgorgement
was excessive and unreasonable and held that the Commission
abused its discretion in not setting the order aside. Id. at
656-57. The court stated that once disgorgement is selected as
the method of sanction, the amount must be reasonable, i.e.
approximately equal to the unjust enrichment. Id. at 656
==========================================START OF PAGE 56======
(citing SEC v. Washington County Utility Dist., 676 F.2d 218, 227
(6th Cir. 1982)). The court reasoned that the disgorgement order
was unreasonable and excessive as to the petitioners, as well as
unwarranted in fact, because it amounted to more than ten times
the amount of their unjust enrichment and the order duplicated
the amount the finder was already ordered to disgorge, which was
the amount of commissions he received pursuant to the agreement.
The court decided that the petitioners were jointly and severally
liable only for the portion of the total commissions the firm
actually retained. Id. The court explained that a disgorgement
order is the means by which a wrongdoer is required to remedy the
unjust enrichment and not, in fact, a fine levied against the
wrongdoer as punishment for conduct. Id.
The Commission has since stated that [w]hile an amount
ordered disgorged need only be a reasonable approximation of
profits causally connected to the violation, the amount disgorged
must be approximately equal to the unjust enrichment, and may be
ordered only against those who received such unjust enrichment.
Kenneth L. Lucas, 51 S.E.C. at 1046 (footnotes omitted) (citing
First City, 890 F.2d at 1231; Hateley, 8 F.3d at 656). In
Kenneth L. Lucas, the Commission concluded that [i]f the
salesman received a large portion of the total excessive markups,
the ill-gotten gains, Applicants cannot be ordered to disgorge
the same amounts. Kenneth L. Lucas, 51 S.E.C. at 1047
(footnotes omitted) (citing Hateley, 8 F.3d at 656).
Respondents, however, are not otherwise entitled to deduct any
miscellaneous expenses such as taxes incurred or salaries paid.
Such deductions would allow them to profit from their fraud. SEC
v. Great Lakes Equities Co., 775 F. Supp. 211, 213 (E.D. Mich.
1991) (a corporation and its president, which were required to
disgorge funds obtained through alleged securities fraud, were
not entitled to deduct overhead, commissions and other expenses
incurred in the corporation's operation), aff'd, 12 F.3d 214 (6th
Cir. 1993); SEC v. World Gambling Corp, 555 F. Supp. 930, 934-35
(S.D.N.Y.), aff d, 742 F.2d 1440 (2d Cir. 1983). In addition,
where an individual owner of a company is, essentially, the alter
ego of that company and the owner s actions are inextricably
interwoven with those of the company, joint and several liability
for the disgorgement amount is appropriate. Great Lakes Equities
Co., 775 F. Supp. at 214-15; SEC v. R.J. Allen & Associates,
Inc., 386 F. Supp 866, 881 (S.D. Fla. 1974).
The evidence presented at the hearing establishes that
Rimson & Co. derived approximately $730,000, in revenue from
sales and market-making of various speculative stocks that were
the subject of fraudulent sales practices and other violations.
Table 3 (see below) shows the bases for this final figure.
Customers who testified at the December 1995 hearing suffered a
total of approximately $274,164.02 in losses attributable to
misappropriated finds, converted checks, and fraudulent sales of
securities that became worthless. Table 4 (see below) shows the
==========================================START OF PAGE 57======
bases for this final figure.
Table 3
Rimson & Co. Revenues from Market-Making and Sale of Securities
Stock Ill-Gotten Revenues Date of
Gains
TWIP $250,000 9/95
WECI 150,000 12/93
LARI 100,000 8/94
LBTI 75,000 8/95
MWTX 60,000 11/94
BTLI 50,000 8/95
HWTH 25,000 11/94
JIND 20,000 11/93
TOTALS $730,000
==========================================START OF PAGE 58======
Table 4
Losses Suffered by Nineteen Customer Witnesses
Total Date
Customer Losses
Customer Losses Incurred Tr. pages
Schaeffer $13,500.00 3/93 566-76
Reynolds 51,098.36 6/93 648-51
Deike 52,515.00 9/93 700-15
Rock 18,916.38 8/93 855-57, 891-95
Spera 423.28 9/93 976-77,983-84, 990-91
Priolo 16,792.50 8/93 998-99,1003-07
Canham 5,132.50 9/93 1018-19, 1034
Brinkmann 1,250.00 5/93 904, 918-19,922-25
Grund 1,500.00 8/93 1083-85,1088-89
Swift 5,000.00 6/93 1097-1116,1122-23
Bright 1,386.00 5/93 1274-75,1286-87
Burch 13,350.00 3/94 1541-46,1548-49
Lerner 17,000.00 7/95 1569-73
Gold 7,800.00 7/95 1580-82, 1585-89
Huykman 1,500.00 12/93 1599, 1604-07
Calabrese 13,500.00 7/95 1653-54, 1656-57
Boland 8,000.00 3/95 1669-74
Coniglio 11,500.00 9/93 1686-87, 1704-05
Rosemarin 34,000.00 6/94 1718-19, 1724-25
TOTALS $274,164.02
==========================================START OF PAGE 59======
Because Rimson & Co. facilitated and maintained a boiler-
room environment and fraudulent sales practices were pervasive, I
conclude that all of the sales of these speculative securities
were accomplished by fraudulent and otherwise unlawful means.
The Division requests that Rimson & Co. be ordered to disgorge
all ill-gotten gains and investor losses in the amount of
$1,004,164.02, plus prejudgment interest, for which Moshe Rimson
should be held jointly and severally liable, and that Moshe
Rimson be ordered to disgorge ill-gotten gains and investor
losses in the amount of $1,004,164.02, plus prejudgment interest,
for which Rimson & Co. should be held jointly and severally
liable. I interpret this as a request for a total disgorgement
amount of over $2 million as to Moshe Rimson and Rimson & Co.
The case law indicates, however, that such a disgorgement order
would be unreasonable, excessive, and unwarranted in fact because
it would exceed the amount of unjust enrichment and duplicate
disgorgement amounts.
Rimson & Co. and Moshe Rimson chose not to offer any
evidence at the hearing and failed to demonstrate that any
reduction should be made to the appropriate disgorgement amount.
Moshe Rimson and Rimson & Co. should be held jointly and
severally liable, however, only for the portion of the total
commissions they actually retained, i.e. the total ill-gotten
gain. The estimated $730,000 in revenue derived by Rimson & Co.
and Moshe Rimson from the sales of these securities, therefore,
is the appropriate measure upon which to base a disgorgement
order. The $274,164.02 is not recoverable pursuant to a
disgorgement order for two reasons. First, a portion of that
amount represents customer losses and, as such, does not
represent ill-gotten profits. Second, a portion of that amount
reflects misappropriated funds which appear, from the record, to
have been retained by others. Thus, I find that Moshe Rimson and
Rimson & Co., jointly and severally, should be ordered to
disgorge a total of $730,000 of estimated ill-gotten profits,
plus prejudgment interest.
The Division argues that the evidence presented at the
hearing demonstrates that Shindman derived approximately
$189,125 in ill-gotten gains from sales of various speculative
stocks by means of fraudulent sales practices, and caused the
customers who testified at the hearing a total of approximately
$95,300 in losses attributable to Shindman's fraudulent sales of
securities. The Division argues, moreover, that because the
evidence shows that, while at Rimson & Co., Shindman conducted a
boiler-room fueled by, and infested with, fraudulent sales
practices, it is reasonable to infer that all of the sales of the
speculative securities at issue by Shindman and his salesmen were
accomplished by fraudulent and otherwise unlawful means. The
Division based disgorgement calculations for sales of three of
the securities at issue, TWIP, LARI, and LBTI, on a formula which
==========================================START OF PAGE 60======
took the total mark-up/mark-down and commission revenue generated
by Rimson & Co. in sales of those securities, multiplied that
number by the percentage of accounts opened by Shindman (75%),
and then divided the result in half. The disgorgement
calculation for the fourth security, INFE, was based on
Shindman s own approximation of his sales in that security. The
Division contends, therefore, that the estimated ill-gotten gains
derived by Shindman from the sales of these securities, plus the
amount of losses sustained by the customers who testified,
constitute the appropriate and uncontroverted measures upon which
to base a disgorgement order. Thus, it requests disgorgement as
to Shindman in the amount of $323,850.65.
Shindman claims, however, that the Division based its
disgorgement calculation on the total amounts customers paid to
Rimson & Co. for a given stock. In addition, Shindman argues
that the Division based its calculations on Rimson & Co. s books
and records, which the Division itself claims are inaccurate.
Finally, he contends that the Division has not proved that any of
the sales were made through the use of false or misleading
statements. He argues, therefore, that if disgorgement is
ordered, the disgorgement amount should equal only the
commissions he earned in connection with the securities sold to
the eight investors who testified at the hearing. Thus,
according to Shindman, disgorgement, if ordered, should total
only $2,848.13.
I agree with Shindman s assessment of the $2,848.13
disgorgement figure as to him. Table 1 in the findings of fact
shows the bases for the final figure. Because Shindman did not
have a financial stake in the corporation, and because he was not
a principal, the proper figure should consist of his admitted
earnings on the securities that he sold to the eight customers
who testified at the hearing.
Penalties
The Division proposes that I impose against Shindman third
tier civil penalties that are, in the aggregate, at least
equivalent to the amount that he should be ordered to disgorge.
Accordingly, the Division proposes that I impose aggregate civil
penalties in the amount of $323,850.65, which represents the
total of Shindman's ill-gotten gains and the losses sustained by
his customers, plus prejudgment interest.
The Division also proposes the imposition of the maximum
third tier civil penalty, $500,000 against Rimson & Co. and
$100,000 against Moshe Rimson, for each of 23 groups of
violations, for an aggregate civil penalty of $11,500,000,
against Rimson & Co. and $2,300,000, against Moshe Rimson.
The assessment of a penalty pursuant to Section 21B of the
==========================================START OF PAGE 61======
Exchange Act depends on a finding that such assessment is in the
public interest. Section 21B(a); see New Allied Development
Corp., 63 SEC Docket 807, 821 (November 26, 1996); First
Securities Transfer Systems, Inc., 60 SEC Docket 441, 446
(September 1, 1995). A three-tier system for assessing the
maximum amount of penalty is specified in Section 21B(b) of the
Exchange Act. For every violation, the maximum amount of penalty
in the first tier is $5,000 for a natural person or $50,000 for
any other person; in the second tier it is $50,000 for a natural
person or $250,000 for any other person; and in the third tier it
is $100,000 for a natural person or $500,000 for any other
person. Exchange Act Section 21B(b). In order to assess a
second-tier penalty, the violation must involve fraud, deceit,
manipulation, or deliberate or reckless disregard of a regulatory
requirement. Exchange Act Section 21B(b)(2). In order to assess
a third tier penalty, the violation must (i) involve fraud,
deceit, manipulation, or deliberate or reckless disregard of a
regulatory requirement; and (ii) have directly or indirectly
resulted in substantial losses or created a significant risk of
substantial losses to other persons or resulted in substantial
pecuniary gain to the person who committed the violation.
Exchange Act Section 21B(b)(3).
Factors that may be considered in determining whether a
penalty is in the public interest and determining the amount of
the penalty are specified in Section 21B(c) of the Exchange Act.
See New Allied Development Corp., 63 SEC Docket at 821; First
Securities Transfer Systems, Inc., 60 SEC Docket at 446, 447
n.15. Section 21B(a) of the Exchange Act requires that the
public interest findings support the amount of a particular
assessment, not merely the general decision to assess a penalty,
and, therefore, allows the assessment of lesser amounts up to the
maximum. These factors include: (i) whether the violation
involved fraud, deceit, manipulation, or deliberate or reckless
disregard of a regulatory requirement; (ii) the harm to other
persons resulting either directly or indirectly from such
violation; (iii) the extent to which any person was unjustly
enriched, taking into account any restitution made to persons
injured by such behavior; (iv) whether the person has been found
to have violated the federal securities laws, or has been
enjoined by a court for such violations; (v) the need to deter
such person and other persons from committing such violations;
and (vi) such other matters as justice may require. Section
21B(c); see S. Rep. No. 101-337, at 14-15 (1990).
Shindman argues that the imposition of a civil penalty would
not be in the public interest because (i) the loss suffered by
the eight customers was relatively small; (ii) he was unjustly
enriched at most to the extent that he earned commissions from
the trades executed on behalf of his customers; (iii) he lacks
scienter; (iv) he never violated the securities laws in the past;
and (v) he has learned a lesson from this experience, therefore a
==========================================START OF PAGE 62======
civil penalty is not necessary to deter him from violating the
securities laws in the future.
I agree that Shindman should not be assessed penalties at
the third tier because he does not have a history of violations
of the securities laws. However, a second tier penalty against
him is warranted because the violations proved against him
including unauthorized trading, involve fraud, deceit, and
deliberate or reckless disregard of regulatory requirements. A
penalty is also necessary to deter other persons from committing
similar violations. Accordingly, a penalty of $50,000 as to each
of the eight testifying customers for each date of loss as shown
in Table 2 is assessed against Shindman. I conclude that none of
the eight customers would have purchased any of the securities
absent the fraudulent conduct of Shindman. The total civil
penalty against Shindman is, therefore, $400,000.
On the other hand, both Moshe Rimson and Rimson & Co. should
be assessed third tier penalties in the public interest. The
$730,000 in ill-gotten gains from the sales of the eight penny
stocks were substantial for both these Respondents, as shown in
Table 3. The losses to the nineteen testifying customers,
totaling $274,164.02, were also substantial, as shown in Table 4.
The violations involved fraud, deceit, and manipulation, and both
Respondents have extensive disciplinary histories. Finally,
others must be deterred from committing similar acts against
potential investors. As to Rimson & Co., a civil penalty of
$500,000 as to each testifying customer for each date of loss as
shown in Table 4 will be assessed, for a total of $9,500,000. As
to Moshe Rimson, a civil penalty of $100,000 as to each
testifying customer for each date of loss as shown in Table 4
will be assessed, for a total of $1,900,000. I conclude that
none of the customers would have purchased these securities or
been deprived of funds absent the fraudulent conduct of Moshe
Rimson and Rimson & Co. in their operation of boiler-rooms and
their assistance in the misappropriation of customer funds.
VIII. RECORD CERTIFICATION
Pursuant to Rule 351(b) of the Commission s Rules of
Practice, 17 C.F.R. 201.351(b) (1996), I certify that the
record includes the items set forth in the record indexes issued
by the Secretary of the Commission on April 5, 1996, and November
20, 1996, and the revised record index issued by the Secretary of
the Commission on January 23, 1997.
IX. ORDER
Based on the findings and conclusions set forth above:
I ORDER, pursuant to Section 15(b) of the Exchange Act, that
Alex David Shindman be, and hereby is, barred from being
==========================================START OF PAGE 63======
associated with a broker or dealer;
I ORDER, pursuant to Section 19(h) of the Exchange Act, that
Alex David Shindman be, and hereby is, barred from being
associated with a member of a national securities exchange or
registered securities association;
I ORDER, pursuant to Section 15(b)(6) of the Exchange Act,
that Alex David Shindman be, and hereby is, barred from
participating in an offering of penny stock;
I ORDER, pursuant to Section 8A of the Securities Act and
Section 21C of the Exchange Act, that Alex David Shindman cease
and desist from committing or causing violations or future
violations of Section 17(a) of the Securities Act, Section 10(b)
of the Exchange Act and Rule 10b-5 thereunder, and Section 17(a)
of the Exchange Act and Rule 17a-3 thereunder;
I ORDER, pursuant to Section 21C of the Exchange Act, that
Alex David Shindman disgorge $2,848.13, plus prejudgment interest
from July 1, 1995, through the last day of the month preceding
which payment is made at the rate of interest established under
Section 6621(a)(2) of the Internal Revenue Code, 28 U.S.C
6621(a)(2), compounded quarterly, pursuant to Rule 610 of the
Commission s Rules of Practice;
I ORDER, pursuant to Section 21B of the Exchange Act, that
Alex David Shindman pay a penalty in the amount of $400,000;
Payment should be made on the first day after this decision
becomes final. Such payment shall be: (i) made by United States
postal money order, certified check, bank cashier s check, or
bank money order; (ii) made payable to the Securities and
Exchange Commission; (iii) delivered by hand or courier to the
Office of the Secretary, Securities and Exchange Commission, 450
Fifth Street, NW, Washington, DC 20549; and (iv) submitted under
cover letter which identifies Alex David Shindman as a Respondent
in these proceedings, and 3-8772 as the file number of these
proceedings;
If and when Alex David Shindman pays any or all of the
disgorgement amount and interest, the parties shall submit to the
Office of Administrative Law Judges, within 60 days, a plan for
the administration and distribution of those funds;
I ORDER, pursuant to Section 15(b) of the Exchange Act, that
Moshe Rimson be, and hereby is, barred from being associated with
a broker or dealer;
I ORDER, pursuant to Section 19(h) of the Exchange Act, that
Moshe Rimson be, and hereby is, barred from being associated with
a member of a national securities exchange or registered
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securities association;
I ORDER, pursuant to Section 15(b)(6) of the Exchange Act,
that Moshe Rimson be, and hereby is, barred from participating in
an offering of penny stock;
I ORDER, pursuant to Section 8A of the Securities Act and
Section 21C of the Exchange Act, that Moshe Rimson cease and
desist from committing or causing violations or future violations
of Section 17(a) of the Securities Act, Section 10(b) of the
Exchange Act and Rule 10b-5 thereunder, Section 15(a) of the
Exchange Act, Section 15(b) of the Exchange Act and Rule 15b7-1
thereunder, Section 15(c) of the Exchange Act and Rule 15c1-2
thereunder, Section 15(g) of the Exchange Act and Rules 15g-2
through 15g-6 and 15g-9 thereunder, Sections 17(a) of the
Exchange Act and Rules 17a-3 and 17a-4 thereunder, and Section
17(b) of the Exchange Act;
I ORDER, pursuant to Section 21B of the Exchange Act, that
Moshe Rimson pay a penalty in the amount of $1,900,000;
I ORDER, pursuant to Section 15(b) of the Exchange Act, that
the broker-dealer registration of Rimson & Co. be, and hereby is,
revoked;
I ORDER, pursuant to Section 19(h) of the Exchange Act, that
Rimson & Co. be, and hereby is, barred from being associated with
a member of a national securities exchange or registered
securities association;
I ORDER, pursuant to Section 8A of the Securities Act and
Section 21C of the Exchange Act, that Rimson & Co. cease and
desist from committing or causing violations or future violations
of Section 17(a) of the Securities Act, Section 10(b) of the
Exchange Act and Rule 10b-5 thereunder, Section 15(a) of the
Exchange Act, Section 15(b) of the Exchange Act and Rule 15b7-1
thereunder, Section 15(c) of the Exchange Act and Rule 15c1-2
thereunder, Section 15(g) of the Exchange Act and Rules 15g-2
through 15g-6 and 15g-9 thereunder, Sections 17(a) of the
Exchange Act and Rules 17a-3 and 17a-4 thereunder, and Section
17(b) of the Exchange Act;
I ORDER, pursuant to Section 21B of the Exchange Act, that
Rimson & Co. pay a penalty in the amount of $9,500,000;
I ORDER, pursuant to Section 21C of the Exchange Act, that
Rimson & Co. and Moshe Rimson, jointly and severally, disgorge
$730,000, plus prejudgment interest from September 1, 1995,
through the last day of the month preceding which payment is made
at the rate of interest established under Section 6621(a)(2) of
the Internal Revenue Code, 28 U.S.C. 6621(a)(2), compounded
quarterly, pursuant to Rule 610 of the Commission s Rules of
==========================================START OF PAGE 65======
Practice;
Payment should be made on the first day after this decision
becomes final. Such payment shall be: (i) made by United States
postal money order, certified check, bank cashier s check, or
bank money order; (ii) made payable to the Securities and
Exchange Commission; (iii) delivered by hand or courier to the
Office of the Secretary, Securities and Exchange Commission, 450
Fifth Street, NW, Washington, DC 20549; and (iv) submitted under
cover letter which identifies Rimson & Co. and Moshe Rimson as
Respondents in these proceedings, and 3-8772 as the file number
of these proceedings;
If and when Rimson & Co. and/or Moshe Rimson pays any or all
of the disgorgement amount and interest, the parties shall submit
to the Office of Administrative Law Judges, within 60 days, a
plan for the administration and distribution of those funds.
This Order shall become effective in accordance with and
subject to the provisions of Rule 360 of the Commission's Rules
of Practice, 17 C.F.R. Section 201.360 (1996). Pursuant to that
rule, a petition for review of this initial decision may be filed
within twenty-one days after service of the decision. It shall
become the final decision of the Commission as to each party who
has not filed a petition for review pursuant to Rule 360(d)(1)
within twenty-one days after service of the initial decision upon
him, unless the Commission, pursuant to Rule 360(b)(1),
determines on its own initiative to review this initial decision
as to any party. If a party timely files a petition for review,
or the Commission acts to review as to a party, the initial
decision shall not become final as to that party.
______________________________
Lillian A. McEwen
Administrative Law Judge
1 This amount reflects a settlement payment to Burch, as reduced
by legal fees. (Tr. 2010-13.)